Skills Investment Presentations - Howard Reed

Tax relief on training: Investigating the options for reform

Howard Reed Landman Economics 1st December 2011

Overview • • • • •

Current rules How much is it worth?

Weaknesses of current system Modelled reforms Conclusions & recommendations

Current rules • Businesses liable for corporation tax (CT) can claim relief on CT for employee training costs • Businesses operated by self-employed people can claim relief on income tax (IT) payments for employee training costs • Self-employed people can claim IT relief for their own business training

How much is tax relief worth?

• No official estimates so I had to calculate value of relief using National Employer Skills Survey and stats from HMRC & NAO • Results: Relief on costs of training: Relief on foregone wage costs: bn TOTAL

£2.9 bn £2.0 £4.9 bn

• A larger sum than any current or recent training subsidy programme (e.g Train to Gain, apprenticeships, etc.)

Weaknesses of the current system • Not targeted (e.g. on low skilled or training leading to qualifications) – Analysis of Labour Force Survey data showed that low earners and the low skilled are currently less likely to train than high earners and high skilled

• Treats self-employed people, employees and unemployed people differently • Very few statistics on how much revenue is foregone from tax relief

Modelling possible reforms Reforms looked at include: •Restricting tax relief to training which leads to a qualification and/or CPD accreditation only •Restricting tax relief on IT for self-employed to basic rate •Introducing IT relief for training which employees pay for themselves •Introducing relief on employer NICs for employees undertaking training •Introducing training tax credit for companies alongside the R&D tax credit

Conclusions Current system of tax relief delivers a large quantity of financial support but there are arguments for using that money more effectively: •Strong case for focusing tax relief on training that delivers high returns •Reform should increase progressivity of tax relief if possible (e.g. helping low-skilled and poor people more than high-skilled/rich) •Make tax relief available to wider range of firms/individuals than the current system

Recommendations • Reform tax relief system so it is more clearly focused on the most effective training courses

– e.g. by restricting tax relief to training courses that lead to an accredited qualification plus CPD courses

• Introduce relief on employer NICs for training undertaken by employees

– This would provide financial support for training in a much wider range of organisations incl public and voluntary sector

• Govt should collect and publish reliable statistics on the extent of tax relief for training (e.g. through tax returns or NESS)