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 are irrelevant for directors and employees, the training costs of whom are governed by different tax law. Generally, where an employer pays for work-related training of any sort for an employee or director, there will be no taxable benefit for the worker and the business will be able to deduct the cost for tax purposes. However, where an employee or director pays for training themselves, it almost certainly will not be a deductible expense for employment tax purposes. This is because it is not incurred “… wholly, exclusively and necessarily in the performance of duties”, as required by the legislation. If the employer reimburses the costs to the worker, this will be a separate taxable benefit for the individual. It is clearly therefore better for training costs to be paid directly by an employer, where possible.
If you want help in understanding if any training you are undergoing will be tax-deductible, please let us know.