1.5 We note that the purpose of this consultation is to enable the government to gain an understanding of:

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1 Taxation of self-funded work-related training: Consultation on the extension of tax relief for training by employees and the self-employed Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) sets out below its response to the consultation on extending tax relief for training expenses incurred by employees and the self-employed. 1.2 Current legislation, contained in ITEPA 2003, sections , provides for employees to be exempted from tax on the benefit of employers paying for, or reimbursing, the costs of work-related training of the employee, including job-related training, health and safety training, leadership development training, etc. The exemption covers learning materials, examination fees and registration of qualifications, plus travel and subsistence expenses (to the extent they would be allowed for employment duties). Additionally, ITEPA 2003, section 311 provides for employees to be exempted from tax on the benefit of a retraining course aimed at helping an employee find another job, where the employee s employment with that employer terminates within 2 years from the end of the course. 1.3 However, while many employers fund their employees work-related training, a significant number of employers either do not, or cannot, meet the cost. As a result, many employees must pay for their own work-related training and, as this is not reimbursed by the employer, no tax relief is available on that expense, except in the very limited circumstance where the employee is employed on a training contract and training is an intrinsic contractual duty of the employment (in which case the courts have decided that the employee is entitled to a tax deduction for the training costs incurred by the employee and not reimbursed by the employer). 1.4 The self-employed can claim a deduction against income for the costs of training where the training maintains or updates existing skills and, thus, is incurred wholly and exclusively for the purposes of their business. However, the self-employed cannot claim a deduction against income for the costs of training that introduces new skills (for example, where the individual wants to upskill to provide additional services to his or her clients) as this is regarded as a capital cost.

2 1.5 We note that the purpose of this consultation is to enable the government to gain an understanding of: How it can best learn the lessons from previous initiatives, such as vocational training tax relief in the 1990s, and tax deductions for training in other countries; How it could design an extension to the existing tax relief that focuses on supporting good quality training for those wanting to upskill or retrain; and How it could design an extension that prevents misuse on recreational activities, is sustainable for the public finance, and is simple to understand and administer. 1.6 As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 1.7 Our stated objectives for the tax system include: Greater simplicity and clarity, so people can understand how much tax they should be paying and why. Greater certainty, so businesses and individuals can plan ahead with confidence. Responsive and competent tax administration, with a minimum of bureaucracy. 1.8 In responding to this consultation document the CIOT recognises that the consultation concerns how the tax system can better support self-funded work-related training. There may, however, be alternatives to using the tax system, such as extending the scope of advanced learner loans, and grants and bursaries etc. In this respect we think it may be helpful to consider the merits of a training credit and we refer to this further below. 2 Executive summary 2.1 We welcome the consultation on the tax treatment of self-funded training and the review of policy that the government have initiated in this area. We agree with the consultation document that a skilled workforce benefits both individuals and the wider UK economy (paragraph 1.1). 2.2 It is important that policy is well thought out and that any changes aimed at supporting those needing to upskill and retrain (paragraph 1.3) are well-targeted. 2.3 We agree that the existing tax reliefs for employer funded work-related training and retraining, and the existing deductibility of training costs for the self-employed, support the government s objective of enhancing workforce skills and improving productivity; as do the availability of apprenticeship levy funds to employers, the Adult Education Budget, grants and bursaries to help pay for courses and training, Advanced Learner Loans, Discretionary Learner Support, and student loans for undergraduates, and the proposed introduction of a National Retraining Scheme. 2.4 Accordingly, our response recognises the existing support for training. Technical-documents/subsfinal/ET/2018 2

3 2.5 In particular, it is important to stand back and consider how additional support for selffunded training through the tax system, or otherwise, will sit relative to the other forms of support currently available in nature, amount, sectors and recipients. 2.6 Support for self-funded work-related training should apply equally to current and future employment (and self-employment) and to (i) maintaining and updating existing skills and knowledge and (ii) upskilling and retraining. 2.7 As regards reforming the existing rules to allow a tax deduction for self-funded work-related training the existing definition of work-related training at ITEPA 2003, section 251 could be adapted as suggested at paragraph 4.16 below. Qualifying training expenses could then be deductible as either a credit against earnings from a current or future employment or selfemployment, or as a tax credit against tax due on such earnings. 2.8 In regard to the self-employed, and training costs that would currently be denied a deduction as being capital in nature, one approach would be to revise the existing legislation to permit a deduction in these circumstances either generally or up to a prescribed limited. 2.9 In these circumstances, a body should be designated to approve training courses in the same way as for the Apprenticeship Levy. However, ideally this should be an existing body so as to minimise administrative cost However, as an alternative approach to providing tax relief for self-funded training, a training credit system could be adopted to provide an upfront credit equivalent to the basic rate of income tax rather than a tax deduction against future earnings. This could provide a greater incentive to retrain and upskill than providing tax relief, especially for the lower-paid who may pay little or no tax and where cash-flow is likely to be a key issue. 3 Chapter 4 Learning lessons 3.1 Question 1: Do you agree with the lessons that need to be learned from experiences in the UK and overseas? 3.2 We agree that such lessons should be learned, particularly from the experience of the vocational training relief scheme, where a condition of the relief was that the course was not undertaken wholly or mainly for recreational purposes or as a leisure activity. This proved very difficult to enforce with the result that the perceived tax leakage was a key reason for the relief being abolished. 3.3 Consequently, the government should consider: : (i) (ii) (iii) (iv) (v) whether self-funded training should be linked to existing or future taxable earnings or should be tax credit based; whether and to what extent support should be capped; whether self-funded training should be focused on particular sectors and, if so, what sectors; how self-funded training meshes with the other support currently available to individuals; whether support for self-funded training should be available to relatively wealthy individuals, or just those on lower incomes; Technical-documents/subsfinal/ET/2018 3

4 (vi) (vii) (viii) (ix) (x) the importance of support being available to those looking to retrain for an alternative career relative to enhancing existing skills; to what extent support for self-funded training will encourage more training or simply underwrite training already being undertaken; whether cash flow is at least important as tax relief; the need to keep things simple so lower skilled and lower income individuals can easily utilise the additional assistance made available; and how such relief can be efficiently policed. 3.4 Government policy needs to be clear on exactly what it is trying to achieve and should be targeted accordingly. 3.5 Tax relief against income is of no benefit if an individual is out of work or earning below the personal allowance. Hence, it may be that alternative support, such as loans, grants and bursaries or training credits may work better. 4 Chapter 5 Objectives and design criteria 4.1 Question 2: Do you agree with the high-level objectives? Are there any others you think are as or more important? 4.2 We agree that qualifying training should be undertaken with approved partners. Designated training should either lead to qualifications or should aim to maintain or improve existing skills and qualifications. For example, a one-day IT course might not lead to a formal qualification, but it would nonetheless appear reasonable for such costs to be included. As would courses designed to develop soft-skills such as those relating to leadership, presenting or networking. 4.3 This said, if training has to be undertaken only with providers offering formal qualifications the ability to claim relief could be too restrictive. For example, in the tax and accountancy profession there are many organisations that provide good quality courses or conferences but may not meet the professions requirements to be approved providers. It would, however, be reasonable for their more informal courses/conferences to be capable of qualifying: unless existing qualifications are maintained they rapidly become out-of-date. We would therefore urge the government not to be too restrictive on this point. 4.4 We do not agree that further support for work-related training should focus solely on individuals needing to upskill or retrain. It is also important to maintain existing skills and knowledge, so that people are kept properly up-to-date. That said, we appreciate that with the advent of the gig economy, automation etc. the government s focus may be more on the former than latter category. 4.5 As an example, many individuals need to undertake compulsory professional development (CPD) to maintain or update existing skills but their employers cannot always fund the training cost (for example, because the business is small and cannot yet afford to incur such costs). These individuals should be supported too. 4.6 Question 3: Do you agree with the high-level design principles? Are there any others you think are as or more important? Technical-documents/subsfinal/ET/2018 4

5 4.7 We agree that the design of any changes should ensure that funding is not available for expenditure on recreational activities or other personal purposes. Also, that any changes should be sustainable and affordable for the public finances and should be as simple as possible to understand and administer. 4.8 For example, relief should not be available in circumstances similar to those set out in paragraph 4.6 of the consultation document. This refers to cases where employers have sought to stretch the existing work-related training exemption to cover holidays in the name of training and research, sampling food at restaurants for employers in the food industry, etc. 4.9 The high-level objectives and high-level design principles are presently very high level. What will determine the shape of any further assistance will be the answers to the points we raise at paragraph 3.4 above It will also be important for the government to decide what will constitute success. For example, will it be up-take in relation to training by those needing to retrain or upskill and, if so, how will this be measured? Or should it be uptake combined with additional earnings by those concerned? In any event, we think that value for money should play a key part where Exchequer funds are to be made available Question 4: How could the rules be reformed to allow a tax deduction for self-funded retraining subsequently used in a new employment or self-employment? Do you think a time-limited carry forward would be the best approach and how could this work in practice? 4.12 The rules could be reformed so that a taxpayer is required to make a declaration to the effect that the various requirements for the expenditure on self-funded retraining to qualify for relief have been met (see paragraph 4.16 below as regards what might be designated as qualifying training). The qualifying costs could then be carried forward as either a credit against earnings from a new employment or self-employment, or as a tax credit against tax due on such earnings. If the deduction is a credit against earnings, rather than against tax, it should be up to the taxpayer to decide when the deduction is taken. This will ensure that the relief is meaningful. For example, it should be possible for the claim to be delayed until earnings are, at least, more than the personal allowance Where self-funded training is undertaken in anticipation of the skills acquired being used in a future self-employment, the training costs could be allowed as a deduction by way of extending the existing pre-trading expenditure rules. This would allow relief for costs incurred within a period of seven years before the commencement of trade This said, we think a training credit system may provide a better option than setting training costs against future income from employment or self-employment. One could adopt a model similar to tax-free childcare, whereby an upfront training credit equivalent to the basic rate of income tax is given The introduction of a training credit whereby the individual pays the net cost of the training and the training provider claims for the tax element (ie the net cost is grossed up at the basic rate), would help those who are currently out of work or earning below the personal allowance with their cash flow. This is important because cash flow is likely to be a key and immediate issue for these people. Technical-documents/subsfinal/ET/2018 5

6 4.16 It would still be necessary to define what training qualifies for a training credit. We think that this is an important point. For example, the existing definition of work-related training at ITEPA 2003, section 251 could be adapted so that designated training includes training which will prove useful when performing the duties of a current or future employment, and which is not undertaken wholly or mainly as a recreational or leisure activity, and which constitutes an approved course of study This would mean that the individual would have to demonstrate and certify that the course is directly relevant to their existing or future employment, which would minimise the risks of the scheme being used to fund expensive hobbies In any event we think that a body should be designated to approve training courses in the same way as for the Apprenticeship Levy. It will be important to minimise administration and bureaucracy as far as possible in this respect. Lessons should also be learned from the past (unhappy) experience of vocational training relief as regards enforcement and potential revenue leakage An upper cap should apply to limit the amount of skills expenditure subject to a credit. The government might initially limit the amount of the tax credit funding to, say, 200 per annum but then adjust the limit in light of experience This approach would be different to that set out in paragraph 5.9 of the consultation document which suggests expenditure incurred on training is carried forward as a tax deduction against future income from a new employment or business However, as noted, by offering an upfront training credit this addresses cash flow issues for individuals on low incomes, ie the individual needs immediate help funding the training at the point of undertaking it, not delayed until some uncertain future date when he or she might earn sufficient new income against which a tax deduction could be taken If there is concern that financial support should be confined to lower earners, the training credit could be recouped for higher earners (for example, those currently or subsequently earning over a defined threshold, or who are higher rate or additional rate taxpayer). In practice, this might be via self-assessment and a high-income training credit charge, ie along similar lines to the existing high-income child benefit charge so that many from whom it would be recouped would not bother to claim in the first place. This would also serve to focus the government s limited resources on those who need them most and help to minimise the risk of the relief being mis-used Such a scheme could, if desired, be tailored to support particular sectors. For example, engineering, science, technology, etc Question 5: How could the rules be reformed to allow a tax deduction when the selfemployed fund training on upskilling for their existing business? 4.25 At present such expenditure is regarded as capital expenditure and is dis-allowed as an income tax deduction. A simple option would be to extend the existing legislation to permit a deduction in these circumstances, either generally or up to a prescribed limited. Or by way or some form of capital allowances deduction on the cost. Technical-documents/subsfinal/ET/2018 6

7 4.26 An alternative approach would be as outlined above, ie don t make any change to tax legislation but rely on a training credit system that applies universally, whether to the employed or the self-employed Question 6: How could the rules be reformed to allow a tax deduction when an employee funds training on upskilling for their current employment? 4.28 We refer to our comments above in response to Question 4. There should be no distinction between training for a current or future employment One of the main difficulties that arises when an employee self-funds work-related training is that the test for a tax deduction is based on the general rule for deduction of employee s expenses at ITEPA 2003, section 336, ie that the employee is obliged to incur the cost and the amount is wholly, exclusively, and necessarily incurred in performance of the duties of the employment. However, if the work-related training exemption at ITEPA 2003, Part 4, chapter 4 was amended to include self-funded training, and suitably adapted as suggested at paragraph 4.16 above, this should allow relief to be claimed more widely whilst still maintaining reasonable (and understandable) restrictions as to what training should qualify for a deduction This said, if the training credit approach outlined above were to be adopted it would not matter whether the expenditure on upskilling (or reinforcement or updating of existing skills) is incurred for an individual s current or future employment (or self-employment). Nor would it matter whether the individual is in or out of work at the time Question 7: To what extent would reforms to tax relief change behaviour so individuals are incentivised to undertake more work-related training? Please explain Extending the circumstances under which tax relief/training credits can be claimed would act as an incentive to individuals to invest their own time and money into work-related training Additionally, under a training credit approach, by (i) capping the amount of the training credit, (ii) restricting the benefit to basic rate and non-taxpayers, (ii) proscribing courses involving recreational or leisure activities, (iv) designating approved courses and, possibly, (v) focusing the relief on preferred sectors (at least in the first instance), this should help target the government s limited resources to best effect and incentivise those for whom the support would be most valuable. This would also provide an immediate, upfront cash-flow benefit Question 8: Do you think the tax system would be the most effective lever to support employees and the self-employed who want or need to upskill, retrain, and take part in career learning? Please explain As noted above, the tax system is not necessarily the way to support individuals to retrain when they fund the training from their own pocket. A training credit system could, work just as well, if not better Question 9: How could the government target work-related training leading to valued qualifications through approved providers and professional organisations? Technical-documents/subsfinal/ET/2018 7

8 4.37 As noted above, a body could be designated to approve training courses. Publicity will then be key, not least in schools, colleges, universities, job-centres and Citizen Advice Bureaux Question 10: How can the scope for misuse be minimised, particularly claims related to recreational activities, and the rules be made enforceable in practice without being resource-intensive for individuals or HMRC? 4.39 As noted above, a body could be designated to approve training courses. The individual could also be required to certify that the training constitutes an approved course of study and is not being undertaken wholly or mainly as a recreational or leisure activity. Furthermore, any tax relief or training credit could be repayable with penalties in cases of abuse Question 11: If it is necessary, at what level would any cap on expenditure eligible for tax relief need to be set to make a meaningful difference to the choices made by individuals? Please explain Any cap on expenditure will need to be modelled. Initially, we would suggest that, to be meaningful, financial support in the region of 200 per person per annum may be appropriate Question 12: Are there complementary or alternative approaches that could ensure any extension is affordable but would still meet its objectives? 4.43 A cap on the tax relief or training credits available from government for self-funded training would appear to be the most logical option to protect the public purse Question 13: How could any changes be administered so that take-up is maximised, errors are minimised, and the system is not resource-intensive for either individuals or HMRC? Is the existing system involving submitting a paper or online form via the Personal Tax Account and self assessment appropriate? 4.45 In terms of extending tax relief for self-funded training that is not currently eligible for tax relief utilising the self-assessment system (for the self-employed and others required to complete an annual return) and the Personal Tax Account (for all other claimants) would be the best options for administering claims. This said, many employees do not understand the current rules on claiming tax relief on eligible expenses generally, so it would be important that adequate (and easy to find and understand) guidance is also included as part of any changes made In terms of a training credit, the simplest approach would be for the training provider and HMRC to monitor the extent of available and remaining financial support available to the individual. The process might look something like: (i) the individual declaring to the designated training provider that they have not exceeded their annual training tax credit and completing an appropriate declaration that the training meets the relevant requirements, (ii) the training provider interacting digitally with HMRC to confirm that this is correct, (iii) the training credit then being paid to the training provider, and (iv) HMRC updating its records and the individual s Personal Tax Account to display the up-to-date balance. Technical-documents/subsfinal/ET/2018 8

9 4.47 Question 14: Are there any issues with the current rules or administration of the existing tax relief for work-related training by employees and the self-employed that need to be resolved? 4.48 In general, the current rules work reasonably well, apart from the revenue or capital expense issue for the self-employed and the lack of relief for employees self-funded training As regards employer problems with the work-related training exemption there can be an issue where training costs reimbursement is offered to a new joiner following a course of study previously undertaken in relation to the new employment. Reimbursement can benefit from the exemption but only where the circumstances are similar to those applied in Silva v Charnock (SpC 332), where HMRC arguably apply the criteria more narrowly than did the Special Commissioner in that case (HMRC s Employment Income Manual at EIM refers). This is something which should be revisited as part of the current review of workrelated training and further guidance added to illustrate where the relief applies and where it does not. 5 Acknowledgement of submission 5.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 6 The Chartered Institute of Taxation 6.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 13 June Technical-documents/subsfinal/ET/2018 9