Self-Employed Training Costs

HMRC have revised their guidance on tax relief for a business owner’s training courses. They now say that learning a new skill in a new area will be tax deductible against profits, if ‘wholly and exclusively’ incurred for any ‘ancillary purposes’ of the trade or business.

Their previous approach was to block tax relief for expenditure on any course fees that provided the business owner with new expertise or knowledge, on the basis that this was capital expenditure, creating an asset of enduring benefit for the business. The effect of that view was that no tax relief was possible on upskilling, but training courses for a refresher or update for an existing skill was allowable.

The new approach aims to consider the fact that sole traders often need to undertake training to acquire new skills or knowledge, to keep pace with:

• advancements in technology; and
• changes in industry practices in their business area.

The changes mean that the costs of any training in the individual’s existing business area will now be tax deductible against the profits of the business, provided that either it:

• updates existing expertise or knowledge; or
• provides new expertise or knowledge.

Example (from HMRC’s revised guidance)

Tim spends his weekends selling his handmade pottery at a stall in his local town centre and now wants to sell his pottery online. He thinks this will help him to reach more customers, which will increase his sales. He decides to complete an e-commerce course and then goes on to complete a short, introductory course on website development.

Although the courses are not directly related to pottery, they will teach Tim new skills so that he can move his business into online selling. The skills and knowledge Tim acquires will help him to keep up to date with the modern ways of selling, so the costs of the course are likely to be an allowable expense for tax purposes.

Training costs of employees and directors

Note that these changes do not affect directors and employees, as different tax laws govern their training costs. Generally, when an employer pays for any sort of work-related training for an employee or director, the worker does not receive a taxable benefit, and the business can deduct the cost for tax purposes. However, when an employee or director pays for their own training, they almost certainly cannot deduct the expense for employment tax purposes. This is because they do not incur it “… wholly, exclusively and necessarily in the performance of duties,” as the legislation requires. If the employer reimburses the costs to the worker, the individual receives a separate taxable benefit. It is better for an employer to pay training costs directly, where possible.

If you want help in understanding if any training you are undergoing will be tax-deductible, please get in touch with a member of our tax team or call 01903 234094.