Training yourself and your workers can be an expensive necessity which won’t always qualify for tax relief, or may even result in tax charges. How can you ensure maximum tax efficiency for your training costs?

Not all workers are equal

The way the tax deduction works depends on who is being trained and why. The position for sole traders and business partners is different from that for directors and employees.

Sole traders and partners

There are no special rules for training expenses. Instead, training costs are tax deductible if they don’t fall foul of two general exclusions. These are that the expense: (1) must be wholly and exclusively for the purpose of the business; and (2) must not be capital expenditure. It’s usually easy to tell if training relates solely to the business. It’s the second condition that’s tricky.

Capital or not?

Expenditure is “capital” if it creates an enduring asset. HMRC’s view is that where training provides “new” skills, the expense is capital and so not tax deductible. But if the training is merely to update expertise, it’s not capital and so is tax deductible. It’s not always easy to tell if a “new” skill has been created as the following two examples illustrate.

Example 1. John is an unqualified bookkeeper. He wants to grow his business and so starts a two-year course to qualify as an accounting technician. While this will reinforce his existing knowledge it’s clear that the course is intended to add new skills that will, hopefully, allow him to take on more complex and lucrative work. The cost of his course and exams is therefore capital.

Example 2. After John qualifies as an accounts technician, he pays to attend seminars to keep up to date with changes to the rules which affect his ability to do his current work. While undoubtedly he’ll pick up “new” skills and knowledge from time to time, that’s incidental to the main purpose which is to allow John to carry on doing his current job and retain his status as a qualified accounts technician.

Directors and employees

The rules for directors (who are taxed in the same ways as employees) are much clearer. If John, from our earlier example, had incorporated his business before starting his training he could have saved tax. The cost of training employees is tax deductible for a company, and at the same time can qualify for an exemption which prevents the payment by the company counting as a taxable perk for the director. The exemption applies where training relates to the employment. John’s training was work related and so the exemption applies.

Tip 1. The exemption applies whether the employer pays for the training direct or reimburses the employee. Note. It’s more efficient for NI purposes for the company to pay direct.

Tip 2. If the cost of training is substantial, it can be worthwhile incorporating your business to make use of the exemption, especially if incorporation was something you were considering anyway. For example, if John was a higher rate taxpayer, putting the training costs of £20,000 through a company would save him up to £8,400.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.