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HMRC internal manual

Business Income Manual

Specific deductions - staffing costs: staff training & development

Expenditure on staff training & development is normally allowable

An article in Tax Bulletin TB27N issued in February 1997 read as follows:

Sometimes, the government gets suggestions that employers should be given tax relief for the costs of training their employees. That surprises us, since except in cases where the employee has some link with the employer outside the employment itself, the disallowance of expenditure by an employer on staff training and development will be extremely unusual indeed.

We are concerned here with the treatment of expenditure by an employer on the training and development of employees in computing the employer’s profits where that expenditure is very properly charged against profits in the employer’s accounts drawn up in accordance with normal accounting practice. This article considers in what circumstances such expenditure may be disallowed either under [S34(1) Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) or S54(1) Corporation Tax Act 2009 (CTA 2009)] or because for tax purposes it counts as capital. Both issues ultimately depend of course on particular facts and circumstances but some general observations may nevertheless be helpful.

By way of preliminary, it should be noted that expenditure disallowable under the general rules mentioned above might nevertheless qualify for relief under other provisions. For example certain employee training costs qualify for a deduction under [S74 ITTOIA 2005 or S74 CTA 2009] and capital expenditure on […] equipment for the purposes of the business may qualify for capital allowances.

Business purposes

Under [S34(1) ITTOIA 2005 or S54(1) CTA 2009] expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. It is important to realise that the test is framed in terms of the purpose of expenditure rather than its result. It does not enable [HMRC] to second guess the wisdom of decisions taken for purely business purposes by reference to the amount of business benefit ultimately obtained from the expenditure. For the same reason, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if in fact the expenditure is incurred exclusively for business purposes.

Against this background it is not easy to see how Section [34(1) or 54(1)] would lead to the disallowance of expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself. This remains the case where the expenditure is on the development of an employee’s skills and attributes, which may not be directly related to his or her current job with the employer, for example training that would only become relevant if the trainee were successful in winning promotion. Nor would expenditure cease to satisfy the statutory test just because the employee may derive considerable personal enjoyment or satisfaction from the training or development in question.

Where on the other hand an employee or director of a company, on whom the expenditure is incurred, has a significant proprietary stake in the business or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes but to provide the employee with some personal benefit. If that is the case then the expenditure is not deductible - the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor’s son who is employed in the business during university holidays. In such cases it is often helpful to ask whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job.

Finally a caveat on the purpose of expenditure: where an employer carries on more than one trade or profession, either at the same time or consecutively, expenditure on training, like other expenditure, for the purpose of one such business (or partly for its purpose) cannot be deducted in computing the profits of the other.

Capital

Some employers may also be concerned that expenditure, though incurred exclusively for business purposes, may be disallowed for tax purposes on the grounds that it is of a capital rather than revenue nature even though it has been charged as incurred against profits in the employer’s commercial accounts. This would be on the basis that the benefit the employer obtains from the expenditure by way of better-trained staff is of such a substantial and enduring nature that the expenditure can be viewed as incurred on an identifiable capital asset.

In principle this may be a possibility but we find it difficult to imagine circumstances likely to occur in practice where the benefit which the employer obtains can be viewed as such an identifiable capital asset. Such factors as the pace of technological and commercial change and an employee’s right to resign and seek work elsewhere militate against such a view.

On a particular point, we would not regard the cost of training staff to use new equipment or systems of a capital nature as itself capital.

Other issues

In this article we have not sought to address the tax treatment of the costs incurred by a self-employed person on his or her own training and development. There was an article on this in TB1G issued in November 1991 [see BIM35660]. Nor is this article concerned with the tax treatment of employees who benefit from training and development expenditure. [S250-S254 Income Tax (Earnings and Pensions) Act 2003 confirm] the […] practice of exempting the benefit-in-kind of genuine work-related training, while taxing employees on holidays and other rewards dressed up as training.

For general discussion of trade purpose see BIM37050 onwards, and for discussion of the capital/revenue borderline see BIM35000 onwards.