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When training becomes taxing

A CASE decided recently by the tax Special Commissioners has highlighted an unusual inconsistency in the tax system covering professional training.

A psychiatrist working in the National Health Service has been told that the costs incurred personally on her professional training are not tax-deductible whereas such training would have been tax-free had her employer paid for it.

Unfortunately, there are two sets of tax rules that operate independently when it comes to the development of employees’ skills. One deals with the expenses for which an employee may claim tax relief and is extremely restrictive – this set applied to the aforementioned psychiatrist. The other is a set of rules that determines what a taxable benefit is when your employer provides it for you.

If employees pay for their own training, they have to do so out of their net income, after PAYE tax and National Insurance Contributions have been deducted. They won’t receive any tax relief for the cost unless it was incurred “wholly, exclusively and necessarily in the performance of the duties of the employment”.

In other words, not only must they need the training to do the job but also the training itself needs to be part of doing the job. Simply putting employees in a position to do the job is not considered sufficient.

On the other hand, if the employer provides the training, even if it is undertaken entirely in employees’ own time and at their own request, neither the employer nor the employees will pay tax or National Insurance because work-related training does not count as a taxable benefit.

To avoid situations such as that in which the psychiatrist found herself, employer and employee could agree changed employment terms, exchanging a lower salary or a future bonus in return for the employer providing the training.

This will usually offer a significant saving and, crucially, will not punish those interested in bettering themselves. In addition, some course fees include VAT and if the employer is able to recover the VAT, the savings are even greater.

There is probably an effect on the employee’s occupational pension contributions if a lower salary is taken for a period but most employees who wish to improve their qualifications will expect to earn significantly more in the future and so catch up in the longer term.

One of the main reasons why employees should raise a more flexible approach with employers is that there are savings to be had by both parties, and they can be of particular benefit to cash-strapped employers.

Salary sacrifice has been endorsed by HM Revenue & Customs in connection with child care vouchers, which would make it hard for them to claim such a training arrangement between an employer and employee is dubious practice.

The really unfair thing is that two employees with different employers could end up in completely different financial situations if one employer was prepared to assist an employee in this way and the other was not. Not only does the individual lose out financially but the economy also loses out on employees who are willing to up-skill.

With the right approach, employees, whether low or highly paid, and employers, especially those who depend on recruiting and retaining trained staff, can benefit.

For further information on this and other taxation issues, contact
Judith Hooper on 01908 687800 or email judith.hooper@bakertilly.co.uk

For more information, visit www.bakertilly.co.uk