Work-related training for employees is a valuable benefit and it’s tax free, however first you must understand the rules, Lorraine Owens explains.
When an employer invests in developing its workforce through training and development there is a benefit to both parties in terms of improved skills. However, at what point does training verge on being a taxable benefit in land rather than employee skills development?
Work-related training means training 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 his/her duties, or, will better qualify the employee to undertake the employment, or to participate in charitable or voluntary activities arising through the employment.
The training must relate to the employee’s current employment or to a related employment. A related employment is another job with the same employer or a person connected with the employer which the employee is to hold, or has a serious opportunity of holding or can realistically expect to have a serious opportunity of holding in due course.
Who pays?
The employer may pay for the training directly or reimburse the employee for the costs they have incurred.
However, where employees pay for their own training with no reimbursement from an employer, it is highly unlikely, but not impossible, that a deduction could be claimed by the employee for such costs.
Rewarding employees?
It is important to note that for the training to qualify as exempt the training cannot be offered as a reward even if it is work related. For the avoidance of doubt, an employee is allowed to enjoy the training, it just can’t be offered purely or partly as a reward in itself! This may seem obvious but I have seen cases where the language used does not support the employer’s contention that the training is not a reward, for example, where it is offered as part of a benefits package. Where there is a mixed purpose, of work related and reward, the costs should be apportioned.
This area is particularly in point in respect of 'team building' events. There are many exciting and fun activities offered by training companies or in house training departments as team building events and if you are hoping that your event will qualify you should ensure the agenda for the day is reasonable. It may be possible to obtain exemption for such events under the annual event exemption but only where the conditions are met; all employees must be able to attend, the training must occur annually and the total costs of all events do not exceed £150 per person per tax year.
Similarly, training such as safer driving courses would qualify where given to employees driving on company business but a day out at Petrol Heads Motor Racing is unlikely to qualify.
Pre-employment training expenses
It is clear from the legislation that training cannot be work related unless the trainee is employed by the employer at the time the training is undertaken. It does not become work related simply because a new employer agrees to reimburse the employee’s costs. However, in cases where the link between the employment and the pre-commencement training is strong, reimbursement may qualify. For example, where an individual has accepted an employment offer and is due to take up the job in the near future and undertakes training relevant to that new role and the employer agrees to reimburse the costs it will probably be allowed.
There has been a contradictory appeal ruling on the subject and so there may be scope for other cases to be allowed, but HMRC contends that the facts of that case are unusual and their stated view is that the legislation does not provide general exemption for reimbursements. Therefore, the message here is take advice if this applies to your organisation.
Ancillary costs
The exemption extends to other costs associated with training. For example, books, other training materials and travel or child care costs so long as travel and childcare are over and above what the employee would normally incur. Exam or other assessment fees and the cost of qualification, registration or award are also exempt.
Repayment conditions
Organisations may also put conditions on training costs so that if an employee leaves in a specified period of time following completion of the training or perhaps fails exams then the employee is required to repay all or some of the costs. Beware of some traps here and make sure that you structure matters in the most tax effective way. If you ask an employee to repay the costs if they leave then this may not be a tax deductible expense for the employee and so what was previously a tax free benefit will become a taxable one as the employee will be repaying the money from taxed income. A more tax-efficient result may be obtained if your employee’s contractual terms allow that the employee will earn less in the last month, or months, of their employment, in other words a contingent salary sacrifice. In this case, so long as the contractual arrangements are correctly structured the employee should only be taxed on the reduced salary received. Again it is important to ensure that you take care with such planning.