The start of the New Year is often the time for resolutions and promises of self-improvement. In a work context, both you as the employer and your staff might be thinking about what courses or training might be beneficial in the coming months. In this month’s back to basics, we have a look at the tax consequences of sending an employee on a training course.

Most of the time these rules are quite straightforward for employees, but the self-employed need to be aware of the tax treatment if they want to take courses themselves. 

Employee training costs

As a general rule, costs incurred by employers in training their employees will nearly always qualify as a deductible expense for the employer.

It doesn’t matter if training is in-house, via an external provider, self-taught, online or full or part time.

The position for the employee is slightly less generous, as the training will only be an exempt benefit in kind if it is ‘work related’ and the costs are ‘related costs’.

The requirement to be ‘work related' is quite broad and encompasses any training which will:

• be useful to the employee when performing their duties or
• will qualify or better qualify them to undertake the employment.

Related costs include not just the costs of course fees and materials, but also travel and accommodation for the course, and any costs of assessment or obtaining a qualification following the training. Training to allow employees to take part in charitable or voluntary activities arising through the employment is not considered a benefit in kind.

In most cases, employers are unlikely to want to pay for training costs which are not related to the employee’s work, with the result that the employer should get a tax deduction and no benefit in kind charge arises for the employee.

Training costs borne by an employee

The position is not as generous when the employee pays for a training cost themselves which is not then reimbursed by their employer.

In most cases, the employee will not be able to get any tax relief for training costs paid for privately as the costs are not considered to have been incurred in the performance of their employment duties.

There are limited occasions where an employee might be able to obtain tax relief, but the bar is high, and the employee will need to be able to show they were contractually required to pay for the courses themselves before any tax relief might be possible.

Training costs for business owners

While relief for training costs for an employee is generous, the tax treatment of training costs incurred for business owners is much more complex.

Where the business is a company, and the owner is a director, then the same rules for employees apply to directors and there should be no issue claiming tax relief as long as the training is work-related as discussed above.

The complications arise where the business is a sole trade or partnership, and it is the sole trader or partner that is looking to take part in the training. In these cases, the rules are much stricter than for an employee – although there were some small relaxations last year. 

A deduction for training costs incurred by self-employed individuals will now be allowed if the training

• updates existing skills or knowledge
• develops new skills and knowledge related to changes in their industry; or
• is ancillary to the trade – for example training to improve administrative skills such as bookkeeping or business development skills such as marketing.

Tax relief is not available for training courses intended to help individuals to start a new business or expand into new areas of business that are not directly related to what they currently do. Such costs are considered to be effectively ‘capital’ costs, with the knowledge gained seen as an asset with long term value.

To help business owners get to grips with the new changes, HMRC has published various examples of allowable and disallowable training costs for the self-employed.

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.  

We regularly publish articles on a range of tax and wider topical issues which affect employers. If you wish to subscribe to our monthly Employer Focus e-newsletter, please contact us.