IT contractor guide to training expenses
When you come to consider training expenses, it is important to establish the different treatment between:
- employees incurring the expense of training,
- self employed (including companies) providing training for employees, and
- the sole proprietor of a business who attends a training course.
Employees who pay for their own training
If an employee pays for his/her own training (without reimbursement from their employer) it is unlikely that the expense will be allowable. For an expense to be allowable against a person's salary it has to be wholly, exclusively and necessarily in the performance of the duties of the employment.
The argument from HM Revenue & Customs is that you are not performing the duties of the employment if you are attending a training course. In other words, the expense of the course will put the employee in a position where he/she can perform the duties of the employment. The leading case in this respect is Blackwell v Mills.
However there is an exception where training is a contractual duty of the employment and any personal benefit is incidental. This stems from a case held in 2010 but is regarded by HMRC as being allowable in a limited number of cases. You must look on this judgement as being exceptional, as the following must apply for the expense from training (as an employee) to be allowable:
- Training is an intrinsic part of the contractual duties of the employment,
- All other duties are being undertaken as part of the training process. They constitute the practical aspects of the training process and are intended to complement the theoretical aspects of the training, which include the externally provided training,
- There is a mandatory requirement for the employee to undertake the external training as an intrinsic part of the duties of the employment, and
- Failure to complete the training and obtain the qualification will mean that the employee will not be able to continue in employment with the employer in the role that would otherwise have been available to them after qualification.
Staff who are provided training by an employer (such as an umbrella company)
Where an employer provides training, the expense is claimed as a deduction in determining the profits of the business and must follow the rules regarding business expenses. The law regarding business expenses is worded in an unusual way in that it tells us what is not allowable rather that what is allowable.
The law will not allow any disbursements or expenses which are not money wholly and exclusively laid out or expended for the purposes of the trade. It follows therefore that the sole purpose of the training has to be business.
The Inland Revenue, now HMRC, made a crucial statement in 1997 - the following is an extract:
"….expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. It is important to realise that the test is framed in terms of the purpose of expenditure rather than its result. It does not enable the Inspector to second guess the wisdom of decisions taken for purely business purposes by reference to the amount of business benefit ultimately obtained from the expenditure. For the same reason, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if in fact the expenditure is incurred exclusively for business purposes.
"Against this background it is not easy to see how Section 74 (1)(a) would lead to the disallowance of expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself. This remains the case where the expenditure is on the development of an employee's skills and attributes, which may not be directly related to his or her current job with the employer, for example training that would only become relevant if the trainee were successful in winning promotion. Nor would expenditure cease to satisfy the statutory test just because the employee may derive considerable personal enjoyment or satisfaction from the training or development in question."
So, where an employee pays for the training and is then reimbursed by the employer normal procedure would dictate that the expense would be recorded on form P11D. This would in turn mean that a claim would have to be made by the employee that the expense is allowable but, with the one exception referred to above, training costs are not generally allowable where the expense is incurred by the employee. This would mean that a benefit was chargeable on the employee but the law exempts a charge on the employee in these circumstances (under S250 ITEPA 2003).
The expenditure, therefore, has to be incurred exclusively for business purposes. The law seeks to differentiate between genuine work related training, whilst taxing employees on holidays and other rewards 'dressed up' as training. In short, the expense regime is not more liberal for employees, or umbrella company contractors - who are employees of that umbrella company.
Company directors who undertake training
Some key elements of the treatment regarding a director of a limited company are present in the same 1997 statement. These elements are important because HMRC, when scrutinising expenses, looks more closely at company directors on the basis that they are generally in control of the finances.
"Where on the other hand an employee or director of a company, on whom the expenditure is incurred, has a significant proprietary stake in the business or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes but to provide the employee with some personal benefit. If that is the case then the expenditure is not deductible - the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases it is often helpful to ask whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job."
Sole proprietors who undertake training
Sole proprietors who enlist a training provider should adhere to the following statement issued by the tax authority (in 1991). The key aspect for expenses, as outlined in the final two of three paragraphs below, is the difference between acquiring new skills and merely updating existing skills.
"There is some uncertainty whether the cost of proprietors of a business attending a training course, directly related to the business activity, is deductible in arriving at the profits chargeable to tax under Schedule D Cases I or II.
"Where attendance at a course is intended to give business proprietors new expertise, knowledge or skills, which they lack, it brings into existence an intangible asset that is of enduring benefit to the business. We take the view that the expenditure is therefore of a capital nature, and deduction is prohibited by ICTA88/S74 (f).
"On the other hand, where attendance is merely to update expertise etc. which proprietors already possess, the expenditure is normally regarded as revenue expenditure and will be deductible if it satisfies the 'wholly and exclusively for the purposes of the trade' test...".
A word about "work related"
To qualify as an expense, the training must be "work related". It is clear that HMRC's current approach to these terms is quite relaxed. Yet any personal benefit must be incidental. For example, if a person is to attend a computer course that is essential for work, the expense will qualify. It may be the case that in the process of the course, skills are acquired that are of benefit to the individual concerned in their private life - but that was not the purpose of the course so the benefit is incidental.
Work related in the real-world
On the other hand, a person may have an affliction that hinders the performance of aspects of their employment. Say a person is to become involved in IT Training. A course on the subject matter and/or presentation skills, use of teaching aids etc is likely to be work related. But if the person concerned suffers from a lack of confidence, then an esteem-building course is not likely to be admitted by HMRC on the grounds that it is "individual related" not "work related".
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