RSS feedsIn an education bill briefing in March, Tony Blair said: ‘We need to skill up, we need to tool up in terms of a skills economy otherwise we will not survive.’
The prime minister’s words fit uneasily with the current tax system, though. A recent special commissioners’ decision denying tax relief for training costs to an employed psychiatrist (Consultant Psychiatrist v R&C Commrs (2006) SpC 557) highlights an anomaly that applies to all employees when different tax consequences apply to what are essentially similar situations.
The individual concerned was an employee of an NHS trust and her contract of employment listed what it considered essential and desirable training. The trust did not pay for the training, so she made a claim for tax relief on the £9,000 that she had personally laid out to fund what all parties acknowledged fell within the trust’s description of ‘desirable training’. The legislation on expenses, now in ITEPA 2003 (the income tax (earnings and pensions) Act), states ‘a deduction is allowed… if the employee is obliged to incur and pay it… and the amount is incurred wholly, exclusively and necessarily in the duties of employment.’
The special commissioner held that the expenditure was not incurred ‘in the performance of the duties’ of the employment. Her duties were not to undergo training, even though it might be necessary to her holding her job and was, at least in part, something she was obliged to incur and pay as a holder of the employment. As a result the claim for tax relief failed.
But contrast this with the employer who provides training for staff, for example, under an accountancy training contract. A separate section in ITEPA deals with this situation and exempts work-related training provision, as long as the cost is met by the employer.
If another NHS trust had paid the consultant’s training costs and recouped those funds by paying an agreed lower salary, they would not have been taxed on the cost of the training as a benefit. Their tax and NICs would have been based on the lower salary.
In both cases the employee has received the same training and effectively the same salary. So why do employees who undertake skills development training without the assistance of their employer get a worse deal from the tax system?
To add insult to injury, the definition of work-related training does not even include the ‘wholly, exclusively and necessarily’ tests and is wide enough to cover ‘a training course or other activity designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which are likely to prove useful to the employee when performing the duties of the employment’. And it is not just the current employment: it can even be a role that the individual ‘can realistically expect to have a serious opportunity of holding in due course.’
To avoid this apparent injustice, employers may consider supporting employee training by offering individuals the opportunity to enter into a salary sacrifice arrangement. This is a contractual variation of employment terms where the employee agrees, in advance, to take a lower cash salary in return for receiving an additional item, for example, a training package. If that item is tax-free when provided by an employer, tax savings result.
Salary sacrifice has effectively been endorsed by HMRC in connection with child care vouchers, but it is of wider application. Car parking, health check-ups and occupational pension contributions are other areas where it brings tax and/or NICs advantages.
The unfair aspect is that an employee whose employer will accept a salary sacrifice arrangement to fund training will be far better off than someone in a similar role elsewhere who undergoes the same training, but whose employer will not agree to such an arrangement. The job and the training are the same, but the employer’s attitude differs. Not only does the second individual lose out financially, but the nation loses out if employees are not encouraged to improve their skills regardless of the support of their employers.
Making the sacrifice
Employees earning at, or close to, the current national minimum wage (£5.35/hour at the full rate) should not be allowed to reduce their cash receipts below this level. Benefits in kind (other than a small amount of accommodation) are disregarded for the national minimum wage.
Reducing cash pay can affect entitlement to earnings-related benefits such as statutory maternity pay or statutory sick pay. On the other hand, there are some circumstances where it may increase entitlement to tax credits. The interaction of the two is particularly complex. HM Revenue & Customs offer some guidance at www.hmrc.gov.uk/childcare/interaction-tc-cv.htm
Reducing contractual pay may have unexpected consequences for earnings-related issues such as occupational pension entitlement, death-in-service benefit or credit-rating purposes.For guidance on salary sacrifice, go to the HMRC website at www.hmrc.gov.uk/specialist/salary_sacrifice.htm
Lesley Fidler is tax director at Baker Tilly
