Paying for your employees to undergo training and development can boost their performance, as well as improving their confidence and wider wellbeing. In the majority of cases, the costs will be deductible for tax purposes for you as the employer, and the benefit to the employee will be tax free.
Employer tax deductions
To qualify for a tax deduction, the costs to the employer of employee training must be incurred ‘wholly and exclusively for the purposes of the business’. This test looks at the purpose of the expenditure, not the actual result, meaning there is no need to demonstrate that any specific business benefit has arisen as a result of the training.
HMRC will also accept that the existence of some non-business benefit should not cause the expense to be disallowed provided it was incurred for business purposes. For example, they would not seek to argue a deduction is not available simply because the employee gets personal satisfaction or enjoyment from the training.
This means that, where an employee has no relation to their employer other than through work, training and development costs are likely to be tax deductible.
However, if the employee is also an owner of the business, or a relative of an owner, there is a risk that HMRC could seek to argue that no deduction is available. This is because the costs are more likely to be motivated by private considerations than purely business ones. For example, a business would be unlikely to get a deduction for paying university fees for the owner’s child, even if that child was employed during summer holidays. In such situations, the best advice is to ask whether the money would still have been spent if an unconnected employee was doing the same job. If the answer is no, then it’s unlikely a deduction will be available.
Employee benefits
Training you provide to your staff is often a tax free benefit.
To be exempt from tax the training must qualify as ‘work related’ - defined as any training course or other activity which is designed to impart, instil, improve or reinforce any knowledge, skills, or personal qualities which:
• are, or are likely to prove, useful to the employee when performing their duties; or
• will qualify or better qualify the employee to undertake the employment, or to participate in charitable or voluntary activities arising through the employment.
As an added bonus, if the training is exempt from tax because it qualifies as work related, then any payment by the employer of related costs will also be exempt. This includes costs of assessment, registration and obtaining a qualification, as well as incidental costs such as additional travel or childcare incurred because of the training.
There is no restriction on the way the training is delivered (whether classroom based, online, part time or full time, internal or external) and it does not matter if the employer pays for the training directly, or the employee pays and is reimbursed by the employer.
Contrast with the self-employed
The rules above are only for training costs of employees, and the rules for sole traders’ training costs are much stricter.
As a rule, expenses relating to developing new skills or retraining with a view to changing occupation will generally be non-deductible for the self-employed. For example, someone taking initial training to be a driving instructor would not be able to claim a deduction, as that would be a capital cost incurred to set up their business.
At the Spring Budget earlier this year, HMRC published updated guidance which says they will allow a deduction to the self-employed where training relates to the existing business, is necessary to keep pace with advancements in science or technology, or is ancillary to the main business but helps it to be run better (for example bookkeeping or digital skills).
These changes aside, the rules on deductibility of training costs for the self-employed remain much stricter than for employers, who can claim tax relief much more easily for the cost of training employees, even in new skills.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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