The cost of training can be quite a significant expense for many businesses – whether it is the training of the owner of the business, or training for employees.
It might seem obvious that such expenses are an allowable deduction for tax purposes, but unfortunately the position is not quite as simple as that.
The way the tax deduction works depends on who is being trained:
Are training courses for proprietors tax deductible?
By “proprietor” I mean the owner of a business, whether a sole trader or a member of a partnership. I do not mean the owners of limited companies, for reasons that will become clear.
There is no specific legislation about training expenses, so we fall back on general accounting principles. There are two tests the training costs have to pass if they are to be allowed as an expense of the business:
First Test – was the training course “wholly and exclusively” for the purpose of the business?
Generally, this will be obvious – if the training relates to activities of the business, then it will be “for the purpose of” the business. Given that we are talking about the owner of the business here, HMRC may look closely at training that takes place in particularly attractive locations, and check to see that a holiday has not been dressed up as a training course, but in bona fide cases, this rule is unlikely to cause too many problems.
Second Test – was the training course “capital” or “revenue” in nature?
This is where the problem generally arises. Capital expenditure is expenditure that creates an enduring asset that can be used in the business, and HMRC take the view that where the training provides “new expertise, knowledge or skills”, the cost of that training is capital in nature, and thus cannot be claimed as an expense. Where the training “is merely to update expertise which proprietors already possess”, however, this is a revenue expense, and as such can be deducted for tax purposes. The quoted phrases come from an article in HMRC’s “Tax Bulletin” published in November 1991. The quotations are sadly typical of much HMRC guidance – it seems to make sense when you read it, until you try to apply it to the real world.
I can see the point of the distinction where the result of the training course is to produce a recognised qualification. I am a Chartered Tax Adviser, and to become one, I had to attend a number of training courses, and pay fees to take my professional exams. I can accept (grudgingly!) that those costs were capital in nature, because my CTA qualification is an “enduring asset” of my business. In order to remain a CTA, I am required to spend a certain amount of time each year on training, and I am also quite clear that the cost of the courses I attend for this purpose are an allowable expense – because they are “updating” my existing knowledge.
The problem comes with training courses where the nature of the knowledge acquired is less clear cut.
An example where deducting expenses for training courses is a grey area
For example, our sister website Property Tax Portal runs one day workshops on property tax. These do not provide any qualifications for those who attend, and the attendees range from people considering buying their first “buy to let” property, to people with large property portfolios and professionals involved in the property business such as lawyers and estate agents.
In the case of the larger investors and the professionals, I assume HMRC would agree that they are “updating” their existing knowledge, and allow them a deduction for the cost of the training course, but what about those who have only just started investing in property, or may not yet have made their first investment? Are they getting “new knowledge”, or “updating existing skills”? Assuming that they have some business experience already, whether as proprietors of a different kind of business or as employees, I would argue that they are “updating” their skills. I think you could even argue that if they have previous experience of the property rental market (as tenants, for example), then again our course is “updating” them.
Unfortunately, I cannot guarantee that HMRC would agree with me in all cases – this is an area where there is “some uncertainty” – to quote once more from HMRC’s unhelpful Tax Bulletin article.
Are training courses for employees (including company directors) tax deductible?
Here we are on much firmer ground, because there is specific legislation (section 250 of ITEPA 2003) which allows an exemption from employment income tax for the cost of “work related training”, where the cost is:
- Paid for by the employee, and reimbursed by the employer, OR
- Paid for directly by the employer
“Work related training” basically means any training that will be useful to the employee in doing his job – though there is an exception where the “training” is essentially a holiday or a reward for good performance.
If you run your business through a limited company, therefore, you do not have to worry about the fine distinctions between capital and revenue expenses – as long as the training course is relevant to the business, the company can bear the cost, and get a deduction for it (as part of the cost of employing you), and you will not be taxed on the benefit you have received.
This also applies to training courses provided to employees (as distinct from the proprietors) of a sole trader or a partnership.
First published November 2006.