HMRC have just revised their guidance on tax relief for 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 because this was capital expenditure, creating an asset for enduring benefit for the business. The effect of that view was that no tax relief was possible on skilling up, unless the training course was a refresher or update for an exisiting skill.
HMRC's old views were echoed by High Court's decision in Dass v Special Commissioner and others [2006] EWHC2491 (Ch). In that case:
- An English tutor who also worked as an advisor in the bringing of appeals before various tribunals claimed tax relief on the costs of taking a law diploma.
- He considered that the training would expand his know-how. HMRC and the court disagreed.
It was announced at Autumn Statement 2023 that HMRC would review tax relief in this area. There was no announcement in the Spring Budget 2024 papers confirming a change in the law. HMRC hold their 'Tax Administration and Maintenance Day' on 18 April 2024 and it is hoped that there will be a change in the law.
This new approach aims to take into account 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.
- Provides new expertise or knowledge.
HMRC has rewritten its Business Income Manual (BIM) BIM35660 - Capital/revenue divide: intangible assets: proprietor's training courses and provided a set of examples to illustrate when relief will apply.
The first list of examples below includes the types of scenarios where the cost of training is likely to be an allowable business expense for a self-employed individual. The second list of examples includes scenarios where the cost of training is unlikely to be an allowable expense.
We have added our commentary as the rules are not clear cut and tax deduction will depend on the exact facts and circumstances of each case.
HMRC: 'Expense likely to be allowable'
Example 1: Kiran works part-time as a wedding photographer. She wants to improve her photo editing skills, so she attends an online refresher course on using photo editing software.
We comment: no mention by HMRC as to whether the online course would be allowable if the photographer took the course to use a new type of software.
Example 2: Ryan is a plumber and attends a beginners’ bookkeeping course. Although the course will not help Ryan with the skills he needs as a plumber, it will teach him how to keep accurate accounting records, which will help him run his business better. The cost of the course is likely to be an allowable expense.
We comment: A no-brainer: of course HMRC wants sole traders to hone their bookkeeping skills!
Example 3 Tim is a potter and he takes an e-commerce course and then a short, introductory course on website development. The courses are not directly related to pottery but they teach skills in online selling. The costs of the course are likely to be an allowable expense.
We comment: would a long course on website development not be allowable?
Example 4
Alex is a website designer and takes a course on Artificial Intelligence (AI) technology for online applications. ‘The course will give Alex new expertise in an upcoming area of technology related to her business. The costs are therefore likely to be an allowable expense.’
We comment: As AI is potentially ‘related’ to any digitalised or online business, presumably this type of course is capable of being allowable for most online businesses.
Example 5
Aditya fits gas boilers. He completes training to install heat pump systems because heat pumps are new and upcoming technology and an alternative to gas boilers. The cost of the training is likely to be allowed as an expense of his business as heat pumps will replace gas boilers and Aditya is acquiring skills to keep up to date with modern technology.
We comment: A course teaching a new skill is allowed due to changes in technology in that industry.
Example 6
Felicity is a personal trainer. She attends a course to improve her understanding of nutrition and gains a basic qualification in nutrition. The knowledge that she gains will also help her to develop better training plans for her existing clients so the cost of the course will be an allowable expense.
We comment: seems quite close to the court's decision in Dass. Will there be a change in the law?
Example 7
Aisha runs an online store selling children’s storybooks that she writes. She attends a beginners’ course on drawing illustrations. The cost of the course is likely to be an allowable expense because Aisha is using her skills to improve the children’s storybooks that she creates.
We comment: that makes sense, all part of the production of a book.
HMRC examples: 'expense likely to be disallowable'
Example 8
Amari is currently unemployed but wants to become a driving instructor and start his own business. He completes a course so that he can become an approved driving instructor and wants to claim the cost of the course as an expense. Disallowed: this is to start a new business that does not already exist.
We comment: we agree, no tax relief as he is not in business.
Example 9
Robert runs a sportswear shop, selling branded clothing. He enrolled in a sports science degree at his local university because he has an interest in the field and thinks it will help him to understand his customers better. The costs associated with the degree course will not be an allowable expense because the knowledge Robert acquires will not specifically help him sell sportswear. The costs are therefore unrelated to his business.
We comment: we are undecided on this one. Science is now so much a part of many sports training regimes that it depends on what is taught and whether that is going to further the business.
Example 10
Simone is a freelance makeup artist and wants to move into the tattooing business and open her own tattoo studio. She undertakes several tattooing courses and wants to claim the costs as an expense. The costs of the tattooing courses were not incurred for the purpose of Simone’s existing business and are unrelated to her makeup artist business, so they are not allowed as an expense.
We comment: tattooing is quite an essential skill in the permanent make-up industry. Arguably, the output of tattooists varies but given the cross-over, we might be tempted would argue that this is extending her skills. She would presumably be able to use this in her existing business in any case.
Example 11
Craig is a taxi driver, but he wants to change his business and move into the painting and decorating industry. He completed a painting and decorating course at his local college and wants to claim the costs of the course. The cost of the course was not incurred for the purpose of Craig’s existing taxi-driving business and is related to the painting and decorating business he plans to set up, so it is not allowed as an expense.
We comment: we agree, no tax relief as it relates to a different business, like example 8 that business has not yet commenced.
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