The way we work has changed, why hasn’t the training tax regime?
Industry-specific skills and qualifications are a gateway to higher earnings and career progression.
But for many contractors, taking time out to invest in training is not a top priority — particularly when this means passing up the next paid opportunity.
For the self-employed there is considerable confusion over what training can and can’t be claimed as tax deductible. The HMRC rules are quite specific, with eligibility for tax-deductible training depending on who is receiving the training and what the training is for.
The current regime for contractors and sole traders
For limited company contractors, any training which is considered ‘for business purposes’ is tax-deductible. For example, a director of a software development business can undertake a marketing course if the expenditure has been incurred for the purpose of the business.
For sole traders, the rules are far less lenient — only training to keep existing skills updated is tax-deductible. For example, an electrician undertaking a course about new regulations needed to continue to operate would qualify for tax-relief. However, training to acquire a new skill is not tax-deductible, so the same electrician would not be able to claim the tax back for a marketing course to expand their client base.
Why is there a difference? For HMRC, acquiring a new skill is a ‘capital investment’ which benefits the individual rather than the existing business in the long-run. In comparison, ongoing training is typically regarded as a ‘revenue cost’ if it is used “wholly and exclusively for the purposes of the trade”.
Incentivising training through the tax system: the case for change
This tax regime runs counter to the government’s goal to create a flexible labour market, poised for rapid technological change. Reskilling the labour force is crucial to fostering this flexibility, yet the current training system is heavily focused on employers and discourages sole traders from diversifying their skillsets.
As it stands, according to the SMF (Social Market Foundation), the self-employed are half as likely as employees to have completed training in the last year. As the self-employed now represent 15% of the total workforce, addressing the training needs of the self-employed is a crucial part of preparing our economy for the future.
The government needs to make training for new skills for the self-employed tax-deductible, as it is for employees. Levelling out the playing field will both enable the self-employed to progress in their careers and improve the resilience of the UK economy.
Making training more accessible
Cost is not the only barrier to accessing training, however. For many contractors, training needs to fit around varying working patterns, which makes attending face-to-face courses unrealistic. Online courses can be more flexible, yet sifting through the bewildering array of options can be a tedious task.
The government should explore certifying online training courses which meet a clear set of criteria, to make completing training quicker and more effective for the self-employed. The RSA (Royal Society of Arts) has even suggested the BBC as a potential platform to pull together training courses from across the web, enabling freelance professionals to easily access trusted and accredited courses online.
Digital platforms could also do more to support the self-employed people they engage with. These companies are well-placed to understand the skills most in-demand from clients and contractors, but are currently reluctant to offer any training.
Platforms have expressed concern that offering such a service to those who find work through their platform could have implications for the employment status of these individuals. Understandably, they have decided to play it safe. If the government provides sufficient reassurances to these digital platforms that providing training is not an indicator that those they engage with should be classified as employees, more platforms may be willing to step up.
With 4.85 million people now choosing to work for themselves, the government’s training and skills policy cannot remain stubbornly focused on employers. Updating these policies is essential to keep pace with the changing nature of work and improve productivity.