Contractors' Questions: When is a training course tax-deductible?

Contractor’s Question: Can an expert please explain what the rub is with the tax deductibility of training if you work for yourself? This article in the ‘Training and Tuition’ section features an accountant’s non-restrictive, liberal test for expensing training.  

Contrast that with a lobbyist’s claim that the system is overly restrictive and needs an overhaul, and you’ll understand my confusion. I need to know, definitively, when I can expense training if I’m a sole trader. Would the HMRC rules on expenses on training be more generous if I were a limited company instead?

Expert’s Answer: As a self-employed individual, you can still deduct training costs when calculating your business’s taxable profits if the training merely “updates existing expertise or knowledge”. The costs will have to satisfy the usual test of being “wholly and exclusively” for the purpose of the business and be seen as a revenue, rather than capital expense.

The revenue versus capital point is what causes confusion. The cost of training which provides “new expertise or knowledge” is regarded by HM Revenue & Customs as a capital rather than revenue expense and so can’t be deducted. But often, it’s a fine line between the two.

For employees, there are specific rules that both allow a tax deduction for the employer and avoid any benefit in kind charge for the employee for training costs. This is less restrictive than the “wholly and exclusively” rule for the self-employed and can include developing employees’ skills and attributes, even if not directly related to their current job.

If you operate your business through a limited company rather than as a self-employed person, then the less restrictive rules for employers/employees would apply in principle. However, if you’re thinking of changing to a limited company, bear in mind that where the costs relate to a controlling shareholder or director, HMRC may be more sceptical about training costs than for otherwise unrelated employees.

And of course, there are many other factors to take in to account when deciding whether to operate a business through a limited company.  

The expert was Lynne Rowland, partner at chartered accountancy firm Kingston Smith.