Tax treatment of directors and employees training costs

We've already discussed training costs for the self-employed in a previous blog. In this article we're going to discuss the tax treatment of directors and employees training costs. These apply where either you or your employees require training to develop or maintain their existing skill set. 

Tax treatment of directors and employees training costs

When considering the tax treatment of directors and employees training costs there are three categories to consider. 

  • Training that is work-related
  • Employer funded re-training
  • Non-work related training

Tax treatment of directors and employees training costs that are work related 

Generally speaking, work-related training, together with any incidental benefit alongside the training, is tax-free when paid for by your company.  If the training costs qualify,they are also tax free when reimbursed to either you or your employees.

The statutory rules defining work related training can be found here. Work related training can also include participation in charitable or voluntary activities provided they relate to the business.

Your company should be able to obtain a tax deduction for training costs in its own accounts and reclaim VAT on work-related training and associated costs.

Although the definition of work-related is very wide you will need to exercise caution. HMRC will challenge a claim if the intention appears to be for fun and entertainment. 

You should not assume a team building course on your own, or with family members at a hotel automatically qualifies. Unless of course unrelated staff members are also required to attend the course.

Additionally, if a proportion of the cost relates to excluded activities (see below) you must apportion the cost.  Although you're allowed to do this on a marginal cost basis. 

For example on the last day of a team building weekend away your company pays for paint balling. This cost would not qualify, however the other costs of the weekend (travel, accommodation, meals etc) would.

Tax treatment of directors and employees training costs  - employer funded re-training

The deductions for your company and the exemption for your employees also apply to qualifying retraining costs.

Your employee must have been employed by for at least 2 years before the time the course begins, or their employment ceases. The training must also be designed to improve or teach new skills which will help your employee find new work.

It must last no more than 2 years and your employee must leave your employment within 2 years of finishing the course.

However if you re-employ your employee within 2 years of them finishing the course the exemption is withdrawn.

Tax treatment of directors and employees training costs  - non work related training

So if these training costs don't qualify what is the tax position? 

If the training is not work-related, it will be a taxable P11D benefit if it is contracted for and paid directly by your company. 

If the training is non qualifying and it is arranged and contracted for by your employee (or you as director), then paid for by your company, it will be taxed as earnings.

If these cost are taxed as a benefit in kind, or earnings, then they can be deducted in your company's accounts as a staff cost. Assuming of course you have incurred the expense for staff motivational qualities. 

What about the VAT treatment?

It's also possible to claim back the VAT cost (if charged). Though educational activities are normally VAT exempt. However, where the training benefit relates to directors in an owner-managed or family run company HMRC may challenge any VAT claim.

Tax treatment of directors and employees training costs  - employee bears the cost

If you as an employee are required to pay your own training costs it's notoriously difficult to obtain HMRC's agreement. The taxman will generally not allow a tax deduction unless you can prove these were incurred wholly, necessarily and exclusively in the performance of your duties.

A claim is most likely to be agreed if your job is a training post, or your job centres on research or appraisal of training techniques and standards.

If you were considering a claim then it's worth reading the case of CRC v BanerjeeThis was one of the few examples where an employee's training costs were allowed by HMRC.

As it is so difficult for an employee to obtain tax relief on training costs they have to incur it's worth considering a salary sacrifice arrangement. This is most relevant to the medical profession This sector tends to have particularly expensive and onerous requirements.

Additional points

Where your company is funding a training course which might include activities the benefit of which are open to interpretation, ensure it contains training materials. 

If relevant, you should also have appropriate literature and appraisals to support evidence that the course is work-related.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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