Follow up

HMRC guidance - training costs

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Can training costs be deducted from profits?

Courses

Your employer clients may pay for training costs for their employees. Usually, such training will be clearly linked to their work, e.g. technical update courses. Sometimes, however, the link between the course and the job role is less clear cut.

Tax position

The first thing to look at is the position for corporation tax (CT), and the good news is that payments your client makes to cover their employees’ training costs will be deductible when working out the taxable profits in virtually all cases, but this is not the end of the story. In some circumstances the payments might give rise to a benefit in kind (BIK) or even earnings, and this means that either Class 1A NI or secondary Class 1 NI will be payable by the company; this will partially reduce the amount of CT saved.

Pro advice. Earnings can only arise if your client reimburses the employees for training they have arranged, and the course is excluded (see below). This can be avoided by having your client arrange and pay for the training directly.

Exemption

A wide-ranging exemption under s.250 Income Tax (Earnings and Pensions) Act 2003 means that there will be no benefit, and no charge for your client, provided the training is “work related”. This is defined as any training course or other activity which is designed to impart, instil, improve or reinforce any knowledge, skills, or personal qualities which:

• are, or are likely to prove, useful to the employee when performing their duties; or
• will qualify or better qualify the employee to undertake the employment, or to participate in charitable or voluntary activities arising through the employment.

Excluded training

Problems arise when HMRC argues that the costs have really been incurred to provide entertainment or a reward of some kind. Where this is the case, the costs will still be deductible for CT but your client will then have responsibilities to report the benefit via the P11D or the earnings via PAYE (if applicable). HMRC guidance is worth reviewing (see Follow up ).

Where there is both a qualifying and excluded part, apportionment of the costs may be required. For example where there is a conference at a country hotel on, say, a Thursday and Friday, and the company then pays for some employees to stay on for the weekend so they can go fishing.

Research

A further point worth looking at is if your client is carrying out qualifying research and development (R&D). This gives an enhanced CT deduction or a repayable tax credit for both direct and indirect costs. Training which is undertaken to enable an employee to directly support an R&D project will qualify as an indirect cost. This may be overlooked, particularly if your client amalgamates the R&D costs themselves.

HMRC guidance - training costs