Contractors' Questions: Is training an allowable expense through my limited company?

Contractor’s Question: When is training or professional development a legitimate business expense for my limited company?

Expert’s Answer: When operating through a limited company, one of the principal benefits of using this structure is the ability to claim business expenses. The likes of training costs may also be factored in as an allowable business expense; driving down any personal costs you may incur as a result of updating your existing expertise for the daily running of your current business.

The intricacies of the measure state that training and professional development costs can be classed as a legitimate business expense and therefore exempt for corporation tax purposes if they are ‘legitimate.’ Lifting the wool around what constitutes as a legitimate expense will be mitigated by several aspects, including the actual nature of the training in question and whether this will strengthen the performance of your business as a result of enhancing your existing skillset -- the keyword being existing.

Off-payroll impetus

As the IR35 private sector reforms are set to bite from April 6th 2020, contractors may be looking to exhaust existing benefits on offer from their limited company, prior to moving ship and turning to an umbrella company, if umbrella working provides a more profitable way of working. With this in view, it’s vital to note the fine print of the HMRC rules which specify that for training and personal development to be classified as an allowable expense, certain aspects should be respected. In fact, HMRC states that any development or training sessions you attend should not assist you in:

• Starting a new business
• Expanding into a new area of business, even if this is in connection with your existing business

A technology sector example

Putting it into perspective, if you are a Java developer and the latest update requires you to undertake a refresher training course to familiarise yourself with new functions and technological intricacies, you’re updating your existing knowledge of Java which is required to fulfil the contractual duties you currently undertake. As you are working on developing your current skill-set, this will typically be classed as an allowable business expense.

If you are a software engineer and you decide to expand your offering into electronics engineering, you are entering into a new arena of business, enabling you to provide services you aren’t currently able to offer. As a result, this cannot be classed as an allowable business expense.

Existing, or new skills?

In summary, if the training is to develop new expertise in your existing field or a new field, this cannot be classed as an allowable expense and is therefore not deductible for corporation tax purposes. If it is to refresh your existing knowledge and develop your current skill set, this will be classed as an allowable expense, allowing your business to benefit from tax relief. Somewhat helpfully, the same general rule in relation to business expenses applies -- any expenses incurred should be wholly, exclusively and necessary for the business.

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The expert was Keith Tully, partner at Real Business Rescue, a company liquidation and business recovery specialist for contractors, small businesses and self-employed professionals.