Tax relief on training

tax relief on training

investigating the options for reform

March 2011

3

Acknowledgements

This research paper was written by Howard Reed of Landman Economics.

It was commissioned by unionlearn to inform the TUC’s policy development

on learning and skills. As such it is not a statement of TUC policy.

Material from the UK Labour Force Survey and Family Resources Survey used

in Sections 5 and 6 is Crown Copyright. The computer files for the LFS (April

2009 through to March 2010 inclusive) and the FRS (2007-08 tax year) were

supplied by the Office for National Statistics (Social Survey Division) and the

Northern Ireland Statistics and Research Agency, and are distributed by the

UK Data Archive at Colchester, Essex.

http://www.unionlearn.org.uk/

4

Contents

7 executive summary

8 introduction

10 government subsidies for training in the UK

train to gain and its replacement

apprenticeships

learning accounts

14 tax relief for training in the UK - the current system

details of the system

estimating the value of tax relief

21 the distribution of training across the working population

25 reforming the system of tax relief

restricting tax relief to certain types of accredited training

restricting the rate of relief on income tax

introducing income tax relief for employees

introducing tax relief on employer NICs

a ‘training tax credit’ for businesses

summary of the advantages and disadvantages of different reform options

36 conclusions and recommendations

5

38 references

40 appendix - detailed calculations of the value of tax relief on training in the UK

estimating training expenditure in the UK using NESS

training expenditure for enterprises not covered by NESS

estimating corporation tax relief

estimating income tax relief

estimate of total tax relief

http://www.tuc.org.uk/

unionlearn tax relief on training 7

Section one

1 executive summary

This policy paper makes a strong case f0r a review of the current arrangements for tax relief for work-related training through the corporate tax and income tax systems. It estimates that the total cost of this relief to the Exchequer is in the region of £5B per annum, but there is little available data on how it is being used by those employers that qualify

It concludes that there are very strong grounds for using this money much more effectively particularly in the current fiscal climate by making it more progressive (e.g. targeting relief on training of low-skilled and low-waged employees) and also more focused on “high returns” (e.g. restricting it to training leading to qualifications and certified Continuing Professional Development (CPD) training).

Unionlearn would add that there is also a strong case for ensuring that union-supported learning (e.g. employee development schemes and Collective Learning Funds) where the employer and/or individual employees make a contribution should also be covered under any reforms to tax relief. This would go some way to encouraging more employers to engage in co-investment training strategies that open up developmental learning opportunities to a wider proportion of the workforce.

There would be substantial savings resulting from these reforms to tax relief on training (around £4.5b) which could then be used to extend training relief on NationaI Insurance contributions in order to provide a similar form of financial support to those employers and employees in the large numbers of workplaces that are currently excluded from relief (e.g. all public and voluntary organisations and private sector companies that do not pay corporation tax).

In addition to these reforms, this report also recommends that the Government start to collect and publish reliable statistics on the extent of tax relief on training. Finding a way to produce reliable estimates on the value of tax relief on training to businesses and self-employed people would be an important contribution to debates around the reform of government policies to promote workplace training.



Section two

2 introduction

For at least the last decade and a half, the structure and extent of government financial support for training, adult education and lifelong learning has been a key concern of policymakers in the United Kingdom. The period of Labour Government from 1997 to 2010 saw a host of new initiatives including Individual Learning Accounts, Modern Apprenticeships and Train To Gain. The nine months since the Conservative-Liberal Democrat Coalition Government took office in May 2010 have seen further changes, with the abolition of Train To Gain, enhanced support for apprenticeships and a commitment towards financial support targeted at small and medium enterprises, against the backdrop of significant cuts in public expenditure to close the fiscal deficit.

Throughout this time, however, the largest single source of public financial support for training in the UK has been tax relief on work-related training – which, according to estimates presented in this report, will reduced businesses’ tax payments by around £5 billion in the current tax year. Tax relief was first studied in detail as part of the Inquiry Into the Future for Lifelong Learning’s comprehensive study of UK adult skills and training policy, Learning Through Life (Schuller and Watson, 2009). But the amount of ground which Learning Through Life had to cover in the space available meant that it was more concerned with ‘broad-brush’ recommendations for the future of UK adult education than detailed recommendations for any component of financial support.

This report looks in more detail at the current rules for tax relief on training in the UK. It estimates the total Exchequer revenue foregone through tax relief and attempts to identify what the distributional effects of tax relief are, and whether the system delivers value for money. The research also looks at whether the system of tax relief could be modified to produce more effective outcomes, and if so, what the most effective reforms would be. The focus of this report is mainly on work-related training although the analysis also looks at adults in the UK currently undertaking learning activities who are not eligible for tax relief under current legislation, and what the benefits of extending tax relief to cover them might be.



The structure of this report is as follows. Section 3 gives an overview of current government funding schemes for training and work-related adult skills acquisition and learning in the UK. Section 4 outlines the current system of tax relief for training in the UK, and presents an up-to-date estimate of how much this tax relief is worth to businesses (including self-employed people). Section 5 presents evidence from the UK Labour Force Survey on the distribution of work-related training across the working population. Section 6 looks at the advantages and disadvantages of various options for reforming the system of tax relief. Finally, Section 7 offers the conclusions from the project - a set of recommendations for making the system of tax relief more effective.



Section three

3 government subsidies for training in the UK

The UK, like most other industrialised countries, provides government support for training, and there are clear rationales for doing so on both efficiency and equity grounds (see Box 1). Financial support from the state for work-related training in the UK at the time of writing (February 2011) comprises two components: (a) subsidies for training and (b) tax relief for training. This section considers subsidy programmes, whereas section 4 looks in more detail at tax relief.

train to gain and its replacement

Currently, subsidies for training are mainly delivered through the Train to Gain (TTG) programme, established in 2006, which grew to an annual budget of around £800 million before its abolition was announced in the Spending Review of October 2010. TTG is a national service for businesses providing subsidies for training provided by a network of training providers registered with the Skills Funding Agency (formerly the Learning and Skills Council). TTG was subject to substantial evaluative research through its lifetime, suggesting that the scheme encouraged training which delivered measurable, although not huge, benefits (Learning and Skills Council, 2010).

A 2010 report by the House of Commons Public Accounts Committee suggested that the programme “has delivered a substantial expansion of training that is flexible and meets employers’ needs” but also that TTG had been badly managed, with initially over-ambitious targets, a period of initial under-spending followed by over-spending as eligibility conditions for the programme were widened, and a failure “to focus expenditure on training with the most benefits in sectors with the highest needs, and with providers who provide good quality training” (Public Accounts Committee, 2010).



Box 1. Why does the government offer financial support for training?

1. Increasing labour market efficiency

There is a significant body of empirical evidence showing that work-related training has a positive impact on earnings and productivity of those undertaking it (see for example Dearden et al (2006), Felstead et al (2007), Tamkin (2005), UKCES (2010)). However, this by itself would not provide sufficient rationale for government intervention in the training market on efficiency grounds. The case for government support for training rests on the idea that the free market will underprovide training investment, for three reasons:

• Positive productivity spillovers

Because knowledge is non-rival, unlike many commodities (one person having a particular skill doesn’t preclude other people having the same skill) the overall social benefits to a person’s skill acquisition will often exceed the private benefits to that person or their firm. However, workers and/or firms providing training, in a free market, will only take the benefits to themselves (rather than social benefits) into account. The implication is that less than the economically efficient level of training takes place in a competitive, unsubsidised training market.

• Funding constraints on workers

Workers may not be able to fund their training because they lack the necessary funds to do so, and they may be unable to borrow money to obtain productivity-enhancing training due to lack of suitable collateral.

• Reluctance of firms to pay for training

If workers cannot afford to fund their own training, firms may be able to step in and fund it instead. However, to the extent that training conveys skills that are transferable across skills rather than specific to one firm, there is a danger (from the point of view of firms funding training) that trained workers will be ‘poached’ by other firms once the training is complete, meaning that there is less incentive for firms to provide training (Becker, 1994; Stevens, 1994). Also, firms themselves may face constraints in being able to fund workers’ training if they are not profitable (this is particularly the case with many small firms, particularly start-up operations).

2. Reducing labour market inequalities

Even if none of the efficiency arguments for government support for training made above were valid, there could still be a rationale for government subsidy to training to reduce inequalities in the labour market - for example, by increasing the earnings of low-skilled workers. As shown in Table 3.2 later on this report, employees with no qualifications are much less likely to undertake training than employees with qualifications at degrees, A level or GCSE level, and given the evidence on the positive effects of training on wages, there is a clear case for subsidising training aimed at low-skilled workers to improve their skills (and therefore their wages).


government subsidies for training in the UK


The decision to abolish TTG in the October 2010 Spending Review was taken in the context of a 28% cut1 in the budget for the Department for Business, Innovation and Skills (BIS) over the years 2010/11 to 2014/15 (HM Treasury, 2010). The Spending Review made a commitment to “exploring mechanisms to increase employer contributions such as employer training levies” although as yet there have been no further details of how this might be achieved. Similarly, when interviewed about the abolition of TTG in November 2010, Business Secretary Vince Cable suggested that it was planned to replace T2G with “an SME (small and medium-sized enterprise) focused training programme” but again, no details have been announced so far.

apprenticeships

Public support for apprenticeships was expanded during Labour’s period in office between 1997 and 2010 over the last government through the network of Sector Skills Councils and the creation of the National Apprenticeship Service in 2009. In England, public subsidy for apprenticeships is currently provided through a network of providers managed by the Skills Funding Agency2, with a maximum publicly funded contribution of 50 percent of the costs of the apprenticeship (with the employer providing the other 50 percent). Total public funding for apprenticeship programmes in the UK in the year 2009/10 was around £1.3 billion and the total number of apprenticeships in the UK is around 1 million (BIS, 2011). In May 2010 the Coalition Government announced funding for 50,000 additional apprenticeships at a cost of £150m, diverted from the Train to Gain budget.

learning accounts

Over the last ten years the administrations in different countries within the UK have experimented with learning accounts as an alternative mechanism for channeling public funding to learning activities through adults directly. The

1 Source: author’s calculations based on HM Treasury (2010) and estimated inflation over the

next five years.

2 For further details, see:

http://readingroom.skillsfundingagency.bis.gov.uk/sfa/SkillsFundingAgencyPolicySummaries

-201011.pdf

http://readingroom.skillsfundingagency.bis.gov.uk/sfa/SkillsFundingAgencyPolicySummaries-201011.pdf

http://readingroom.skillsfundingagency.bis.gov.uk/sfa/SkillsFundingAgencyPolicySummaries-201011.pdf


original Individual Learning Accounts programme, launched in 1999, provided government subsidies for any adult to undertake learning with registered providers. The original scheme was abolished in 2001 due to widespread fraud among learning providers, but Wales and Scotland have both relaunched versions of the scheme targeted specifically on low income individuals. The Scottish scheme provides subsidies of £500 per year for a range of advanced (higher education level) courses and £200 per year for shorter courses3. In England, Skills Accounts have been piloted as a possible successor to Individual Learning Accounts but the scheme has not been rolled out nationally.

3 For information on ILAs in Scotland see http://www.ilascotland.org.uk/ILA+Homepage.htm


http://www.ilascotland.org.uk/ILA+Homepage.htm


Section four

4 tax relief for training in the UK - the current system

The current system of tax relief for training in the UK operates through three main channels:

1. Businesses liable for corporation tax can claim corporation tax relief for the training costs of their employees.

2. Businesses operated by self-employed people can claim relief on income tax payments for the training costs of their employees.

3. Self-employed people can claim relief on income tax for their own business training.

However, employees cannot claim tax relief for training which they undertake themselves which has no connection with their current job. Thus, the current system is orientated towards tax relief for businesses rather than for employees.

The first part of this section gives details of how tax relief is claimed and what can be claimed for, while the second part presents estimates of the value of tax relief across the whole UK economy.

details of the system

There are around 1.9 million registered companies in the UK with a potential corporation tax liability, but only around 1 million of these actually make a gross trading profit, and only 914,000 businesses actually paid corporation tax in 2008-09 (the latest year for which detailed figures are available)4. Figures from the Office for National Statistics show that total employment in

4 See HMRC Corporate Tax Statistics, http://www.hmrc.gov.uk/stats/corporate_tax/menu.htm,

Table 11.3


http://www.hmrc.gov.uk/stats/corporate_tax/menu.htm


the for-profit private sector in the UK in 2009 (the latest year for which a detailed breakdown is available) was around 22.8 million people5. However, only 16.9 million people worked in companies registered for corporation tax (either as employees or company directors) rather than in partnerships or as self-employed sole traders (who are liable for income tax rather than corporation tax).

Assuming that the proportion of people working in companies who actually paid corporation tax in 2009 is the same as the proportion of companies paying corporation tax6, this means that around 8.3 million people in the UK work for companies that claim corporation tax relief on training. It should be noted, however, that the actual number of trainees for which CT relief is claimed by companies is substantially less than this because many employees do not undertake any training in the course of the tax year. Section 5 presents more evidence on what proportion of employees undertake training.

Companies claim tax relief against their corporation tax bill by subtracting expenditure on training from their profits. Training is one of a number of expenses companies can claim for including operating costs, allowances for capital investment, business insurance and employee wages. Companies can claim against any kind of training including induction training and away days as well as training that leads to an accredited qualification. As specified in the HMRC guidelines available online7, the definition of work-related training which is eligible for relief is a broad one:

“Work-related training is training for an employee’s current employment or a ‘related employment’. It is defined as any training course or other activity

5 See http://www.statistics.gov.uk/downloads/theme_labour/LMS_FR_HS/WebTable04.xls,

accessed February 2011.

6 There is no a priori reason why this should be the case, but in the absence of reliable data

on the pattern of corporation tax payments by companies according to numbers of

employees, it seems a reasonable working assumption.

7 http://www.hmrc.gov.uk/guidance/480.pdf


http://www.statistics.gov.uk/downloads/theme_labour/LMS_FR_HS/WebTable04.xls

http://www.hmrc.gov.uk/guidance/480.pdf

tax relief for training in the UK - the current system


which is designed to impart, instil, improve or reinforce any knowledge, skills, or personal qualities which:

• are, or are likely to prove, useful to the employee when performing his or her duties, or

• will qualify or better qualify the employee to undertake the employment, or participate in charitable or voluntary activities arising through the employment.

The term includes a wide range of practical and theoretical skills, so long as those skills are relevant to the employee. Where leadership team skills are appropriate to the employee, participation in activities such as Outward Bound, Raleigh International, or Prince’s Trust will qualify. The cost of an employee’s participation in a genuine Employee Development Scheme, which seeks to improve the employee’s attitude towards training by commencing with an enjoyable course as an introduction to more concentrated job-related training, will also qualify.”

(HMRC, 480 [2010], Expenses and Benefits: A Tax Guide, http://www.hmrc.gov.uk/guidance/480.pdf, Appendix 9.)

Reporting requirements for corporation tax and for income tax are minimal. Companies and self-employed people do not need to specify the amount spent on training for employees (or themselves in the case of self-employed people), although obviously there is a requirement to maintain records of the extent of training undertaken (and receipts from providers, for example) so that tax inspectors can verify that the correct amount of tax relief was claimed in the event of an HMRC investigation into the company or person concerned.

estimating the value of tax relief

Quantifying the value of these streams of tax relief in terms of government revenue foregone is not straightforward. The UK Government publishes no statistics on the value of tax relief (mainly because the lightness of the reporting requirement means that there is no administrative data on the extent of training undertaken), and in fact HMRC makes no effort to quantify the extent of tax relief even for internal purposes, as our enquiries via

http://www.hmrc.gov.uk/guidance/480.pdf


Parliamentary Questions (PQs)8 and Freedom of Information (FOI) requests9 in summer 2010 revealed.

Work undertaken by Nigel Brown, Mark Corney and Mick Fletcher of Nigel Brown Associates in 2009 for the Inquiry into the Future of Lifelong Learning (Schuller and Watson, 2009) produced detailed estimates of the value of these streams of tax relief in terms of foregone government revenue using data from the National Employer Skills Survey for 2007 combined with various published statistics from HMRC and the National Audit Office. Brown et al concluded that tax relief on training amounted to £3.7 billion of relief on the costs of training, plus another £2.0 billion of relief on the wage costs of employees’ wages, making a total of £5.7 billion of relief. These figures use data which is now a few years out of date, and part of the rationale for this project was to produce updated figures for the value of tax relief using more up-to-date data, and also some slight improvements to the methodology. The new calculations suggest that tax relief on training in the current tax year of

8 On 14 June 2010, in response to a Parliamentary Question from Tom Watson MP on the

extent of tax relief for corporations and self-employed people, the Exchequer Secretary, David

Gauke MP, said, “This information is not available. Neither self-employed individuals nor

employers are required to report these amounts separately to HM Revenue and Customs. If

amounts are not taxable, employers need not report them at all.” See

http://www.theyworkforyou.com/wrans/?id=2010-06-

14a.1782.h&s=exchequer+speaker%3A11309#g1782.q0

9 The author made an FOI request in July 2010 asking for (a) figures on the extent of tax relief

on training, and (b) in the event that exact figures were not available, but HMRC nonetheless

uses estimates of the amounts claimed for tax relief on training, information on any estimates

used. The reply from HMRC, dated 27 August 2010, stated that the information was not

available (for the same reason given in response to the Parliamentary Question discussed in

the footnote above), and furthermore, that HMRC does not make estimates of the amount of

relief given, as shown in the list of exemptions for which the cost is not known on the HMRC

website at http://www.hmrc.gov.uk/stats/tax_expenditures/00ap_b2.htm


http://en.wikipedia.org/wiki/HM_Revenue_and_Customs

http://www.theyworkforyou.com/wrans/?id=2010-06-14a.1782.h&s=exchequer+speaker%3A11309#g1782.q0

http://www.theyworkforyou.com/wrans/?id=2010-06-14a.1782.h&s=exchequer+speaker%3A11309#g1782.q0

http://www.hmrc.gov.uk/stats/tax_expenditures/00ap_b2.htm



2009-10 amounted to £2.9 billion of relief on the costs of training, plus £2.0 billion of relief on wages, making a total of £4.9 billion. A full breakdown of the new calculations into corporation tax relief, income tax relief for self-employed people on training undertaken by their employees and income tax relief for self-employed people on their own training is shown in Table 1. (More details of the methodology are given in the Appendix.)

Table 1. Estimated value of tax relief on training in 2009-10

Element of relief Value (£bn) Corporation tax: Relief on direct training costs 1.73 Relief for wages of employees undertaking training 1.66 Total Corporation Tax Relief 3.38 Income tax for self-employed people: Relief on direct training costs of training undertaken by employees of businesses run by self-employed people

0.31

Relief for wages of employees undertaking training 0.30 Relief for direct training costs of training undertaken by self-employed people themselves

0.86

Total Income Tax relief 1.47 TOTAL TAX RELIEF ON TRAINING 4.86 Of which: Relief for direct training costs 2.90 Relief for wages 1.90 Source: author’s calculations using National Employer Skills Survey, Family Resources Survey, ONS data and administrative data. See detailed calculations in Appendix.

These new calculations are similar in slightly smaller than those made by Brown et al. Partly this reflects reductions in the basic rate of income tax (from 22% to 20%) and the main rate of corporation tax (from 30% to 28%) since the 2007/08 tax year, which was the year Brown et al based their calculations on. Partly it is a result of reductions in training expenditure per head in the latest data from the National Employer Skills Survey, and also some minor methodological changes (see the Appendix for full details). Nonetheless,


whether we use the total figure for tax relief of £4.9 billion or just the direct training costs component of £2.9 billion, tax relief is several times bigger than the funding allocated to Train to Gain, let alone the smaller (as yet unannounced) programme which is designed to replace it.

Tax relief on training represents by far the biggest stream of public funding supporting workplace training (or for that matter, any other form of adult skills acquisition outside of the higher education budget.) However, it is clear that compared to Train to Gain or other public funding programmes, the tax relief system is very different in crucial ways.

Firstly, no attempt is made to target tax relief on particular kinds of training courses (e.g. those that lead to an accredited qualification) or on particular types of trainee (e.g. the low skilled). This means that tax relief is a relatively expensive way of encouraging particular types of training which policymakers might see as particularly beneficial.

Secondly, the current system features anomalies in the way employees, unemployed people and self-employed people are treated. Self-employed people are able to claim tax relief on their own direct training costs (although not the value of their foregone remuneration accounted for by their time spent training.) Companies are able to claim tax relief for both their own training costs and employees’ wages for the time they spend training. By contrast, people not in work cannot claim tax relief for any training they pay for while not working. This would mean, for example, that a person made redundant who funded his or her own retraining for a different job would not be able to claim tax relief as a refund against his or her earnings in their previous job (or his or her earnings in a future job acquired after completing the training.) Relative to people in employment, this acts as a disincentive for unemployed people to undertake training.

Finally, because employers and self-employed people are not required to specify the amount being claimed for training in their tax returns (it is just included in the general ‘expenses’ category of the return), official statistics on the amount of revenue that the UK exchequer foregoes from tax relief are non-existent (as we found when we used PQs and FoI requests in an attempt to get this information). Compared with the considerable amount of evaluation and auditing work which the Train To Gain scheme received (for example), the lack of statistics on the extent of tax relief leaves policymakers very much ‘flying blind’ when it comes to looking at the impact of the current tax relief system, or possible alternatives to it.




The next section of this report combines our updated figures on the aggregate value of tax relief with further analysis from the UK Labour Force Survey on the characteristics of people who undertake training to look at what the impact might be of changes to the current system on the distribution of training undertaken across the workforce, and on current costs.


Section five

5 the distribution of training across the working population

In order to assess who would gain most from reforming tax relief it is first necessary to establish what the impact of the current system is. The best source of data on training at the individual level in the UK is the Labour Force Survey (LFS), which interviews around 60,000 households every three months. The dataset is designed as a “rolling panel” where households are interviewed for five consecutive quarters (over a period of 15 months in total) and then dropped, to be replaced by a new sample of households. Thus, one fifth of the sample is refreshed every three months.

In the LFS interview, adults in employment (whether employees or self-employed) are asked, “in the last three months have you taken part in any education or any training connected with your job, or a job you might be able to do in the future?” They are also asked about training or education in the last four weeks. Interviewees who respond ‘yes’ to the four week training question are asked a number of follow-up questions, specifically:

• Whether the training is leading to an accredited qualification (and if so, at what level);

• Whether training was on-the-job, off-the-job or both;

• What the duration of the training course is.

The LFS also contains detailed information on weekly earnings and hours of work which can be used to derive a measure of hourly wages for employees in the sample (unfortunately no income information is collected for self-employed people). The calculations in this report use data from the tax year 2009-10. Between April 2009 and March 2010 the overall incidence of training in the LFS (using the thirteen week question) was around 28 per cent of employees and 14 percent of self-employed people.

Table 2 shows the proportion of people who undertook training in the thirteen weeks prior to being interviewed in the LFS across the distribution of hourly


the distribution of training across the working population


wages in the UK in eight different bands, ranging from the lowest waged workers (£6 per hour or less) to the highest paid (£30 per hour and above).

Table 2. Incidence of training in the LFS by level of hourly wages

Hourly wage level Percentage of all LFS employees in this wage

band (%)

Percentage of employees within this wage band undertaking training in last 13 weeks (%)

Under £6.00 13.5 21.8 £6.01 to £8.00 18.6 23.3 £8.01 to £10.00 15.6 26.1 £10.01 to £12.00 11.3 29.3 £12.01 to £15.00 13.8 33.6 £15.01 to £20.00 13.7 37.4 £20.01 to £30.00 9.4 36.3 £30.01 and above 4.1 33.8 OVERALL 100.0 24.8 Source: author’s own analysis of Labour Force Survey data, 2009-10

Table 2 shows a clear pattern, with employees on lower hourly wages being less likely to have undertaken training in the previous thirteen weeks than employees on higher wages – at least as far up as pay levels of £15 to £20 per hour (a maximum of about £42,000 for someone on a 40-hour week). Above this level, training propensity declines slightly from a maximum of 37 percent to around 34 percent for the highest paid category (£30 per hour and above). But clearly, across most of the wage distribution there is a positive wage-training gradient. (Note that the overall propensity of training in this table, at 24.8 percent, differs from the 28 percent figure mentioned earlier because the sample here is made up only of those workers from whom income information was collected, which only happens for LFS interviews in the first and fifth quarters of the rolling panel).

It should also be noted here that if anything, these results probably understate the strength of the correlation between training propensity and wage level. This is because, if employees pay some or all of the costs of their training through lower wages (as standard economic theory predicts)10 then we would expect wages for people undertaking training to be lower than for people not undertaking training, other things being equal. But this effect

10 See Becker (1994) for a fuller explanation.


would tend to lead to an increase in observed training propensity at lower wage levels. Whereas in fact we see the opposite: training propensity is lower at lower wages. This means that the underlying relationship between training propensity and long-run wage levels is probably even stronger than we observe in Table 2.

For self-employed people it is harder to assess the relationship between income level and training because there is no information on self-employed incomes in the LFS. The best alternative is to analyse training propensity broken down by highest qualification held. Table 3 shows this breakdown for self-employed people and (by way of comparison) for employees.

Table 3. Incidence of training in the LFS by level of highest qualification,

2009-10

Self-employed Employees Highest qualification

% in band as proportion of

all self-employed

% of people in band

doing training

% in band as proportion of all employees

% of people in band doing

training

Degree or equivalent

25.7 37.3 24.6 24.5

Other higher education

10.1 36.0 9.1 16.0

A level or equivalent

22.8 27.8 26.1 11.5

GCSE grades A-C or equivalent

22.2 23.7 17.1 10.8

Other qualifications

11.4 19.0 12.2 7.9

No qualifications 6.9 9.0 9.9 2.3 Don’t know 0.9 15.0 1.0 8.9 OVERALL 100.0 27.7 100.0 13.6 Source: author’s own analysis of Labour Force Survey data, 2009-10

Table 3 shows clearly that three-month training propensity is only around half as much for self-employed people in the LFS (at around 14 percent) as for employees (28 percent). There is a very strong positive association between the level of highest qualification held and training propensity, for both employees and the self-employed. Around 37 percent of employees with degrees, and 25 percent of self-employed people with degrees did some training in the 13 weeks prior to the interview, compared with only 9% of self-


the distribution of training across the working population


employed people with no qualifications (and only 2 percent of employees with no qualifications).

So, in general better-qualified and higher-paid people are more likely to be undertaking training than less-qualified (or unqualified) or lower-paid people. This is an important finding to remember when looking at possible reforms to the current system of tax relief – especially if policymakers are interested in using tax relief to encourage more training among low-skilled and low-paid workers.


Section six

6 reforming the system of tax relief

Given that tax relief currently accounts for an estimated £4.9 billion of foregone Exchequer revenue in total, it makes sense to ask whether the current rules on tax relief are the most effective use of public funds. This section looks at possible reforms which would change the applicability of tax reform in some way – either restricting it or extending it. Where the data allow, I provide approximate costings and distributional effects of each possible reform based on current workforce training behaviour.

restricting tax relief to certain types of accredited training

The first reform examined here would restrict tax relief to only certain types of training – in particular those which are more clearly focused on improving productivity. In the first instance I consider training which leads to some kind of accredited educational or vocational qualification. Later on in the section I discuss easing the restriction to include Continuing Professional Development (CPD) courses as well.

There is a large body of evidence showing a positive relationship between educational qualifications and earnings.11 Research on the effects of work-related training on earnings consistently shows that training which leads to a qualification delivers bigger returns than training that does not12, and so it can be argued that this policy represents a good way of targeting tax relief on training which produces the highest returns. It is also in line with government targets to increase the proportion of the workforce qualified at various levels between now and 2020.13

11 See for example the analysis by Sector Skills Councils in UKCES (2007).

12 See for example Blundell et al (1996), BIS (2009)

13 See UKCES (2009)


reforming the system of tax relief


In the Labour Force Survey, individuals who undertook training in the four weeks prior to the survey are asked whether this training will lead or has led to a qualification. In 2009-10, 13.8 percent of employees, and 6.7 percent of self-employed people, undertook training in the four weeks prior to the survey (these are lower proportions than the number of people who undertook training in the thirteen weeks prior to the survey, as discussed above, because the training question refers to a shorter time period). Out of the sample who undertook training in the last four weeks, 9 percent of employees and 8 percent of self-employed people were undertaking training which led to a qualification. It is clear, then, that training which leads to a qualification is a relatively small subset of training as a whole.

Based on these figures, restricting tax relief to work-related training which led to a qualification would reduce the overall revenue foregone from tax relief to roughly one-tenth of its current value – i.e. about £500 million. It should be stressed that this is an approximate estimate only because it does not take account of differences in the cost of training which leads to a qualification compared with training that does not, and also it makes no allowance for whether companies which pay corporation tax are more likely to have employees undergoing training that leads to a qualification than those that do not pay corporation tax, or whether self-employed people paying income tax at higher rates are more likely to be involved in training leading to qualifications than those paying tax at the basic rate. To the extent that training which leads to a qualification is more expensive (on average) than training which does not, the savings from this policy would be smaller than suggested above.

Tables 4 and 5 give us some information on what the distributional effects of restricting tax relief to courses which lead to a qualification might be. Table 4 looks at the proportion of employees undertaking training leading to a qualification across the wage distribution – both as a proportion of all employees and as a proportion of employees conducting any training in the previous 4 weeks. Meanwhile, Table 5 looks at similar statistics broken down by the level of highest qualification attained, for employees and self-employed people respectively.

Table 4 shows that, in contrast to the overall incidence of training by wage level presented earlier in Table 2, training that leads to a qualification has a higher incidence for employees on lower wages. For employees earning £6 per hour or less, 15 percent of the training undertaken leads to a qualification,


whereas for employees earning £30 per hour or more, the comparable figure is just 4 percent.

Table 4. Training that leads to a qualification in the LFS by level of hourly

wages: employees

Hourly wage level LFS employees undertaking training leading to a

qualification as % of all employees in this wage

band

LFS employees undertaking training leading to a

qualification as % of employees undertaking training in this

wage band Under £6.00 2.0 15.1 £6.01 to £8.00 1.5 12.7 £8.01 to £10.00 1.6 12.6 £10.01 to £12.00 1.8 12.0 £12.01 to £15.00 1.4 8.2 £15.01 to £20.00 1.4 7.8 £20.01 to £30.00 1.1 6.1 £30.01 and above 0.6 3.8 OVERALL 1.5 9.0 Source: author’s own analysis of Labour Force Survey data, 2009-10

Table 5 shows that workers with lower levels of qualifications – e.g. A levels or GCSEs - who are undertaking training are also more likely to be doing training that leads to a qualification than workers with degrees. This is true for both employees and self-employed people.

The upshot of these results is that it is likely that a policy which restricted tax relief to work-related training which leads to a qualification would have a more progressive impact on the distribution of earnings from employment and income from self-employment than the current policy. However, simply keeping the existing structure of tax relief but restricting relief to qualification-related training would result in tax relief being worth only around £500 million - a small fraction of its current value. This would save the Exchequer a lot of money, but would also rule out tax relief for a lot of training which does not lead to a qualification but is nonetheless worthwhile.

For this reason, it would probably be best to include certain other types of training course as eligible for tax relief as well. For example, if CPD (continuing professional development) training were included in the definition of training eligible for relief, this would broaden out the scope of the relief somewhat. Unfortunately, the Chartered Institute of Personnel Development (CIPD) does




not publish statistics on the proportion of training undertaken which is CIPD-certified, so it is not possible to provide estimates of what the effects of including CPD training in tax relief would be on the overall costs of tax relief.

Table 5. Training leading to a qualification in the LFS by level of highest

qualification, 2009-10

Employees Self-employed Training leading to a qualification as % of: Highest qualification

All employees in

the LFS at this

qualification level

Subset of employees

undertaking training at

this qualification

level

All self-employed in

the LFS at this qualification

level

Subset of self-employed

undertaking training at this

qualification level

Degree or equivalent

1.3 6.8 0.7 5.5

Other higher education

1.5 8.4 0.6 9.0

A level or equivalent

1.5 10.6 0.6 10.5

GCSE grades A-C or equivalent

1.3 10.9 0.4 7.5

Other qualifications

0.9 10.2 0.5 15.6

No qualifications 0.4 9.7 0.1 13.3 Don’t know 0.7 9.6 0.0 0.0 OVERALL 1.2 9.0 0.5 8.0 Source: author’s own analysis of Labour Force Survey data, 2009-10

restricting the rate of relief on income tax

One way of targeting tax relief lower down the income distribution (or at least, reducing the amount of relief at the top of the distribution) would be to restrict tax relief to the basic rate (rather than higher rate) of income tax for self-employed people. It is not possible to use the LFS data to work out the split between basic rate income taxpayers and higher rate taxpayers for the self-employed, because the LFS does not have income information for self-employed people. However, the Family Resources Survey (FRS), another UK


household survey, does have information on self-employed incomes and although it does not have information on individual training, it does have some (limited) information on educational attainment which can be used to map the results from the LFS data for self-employed people (in Table 5) across to the FRS to give an approximate figure for the proportion of training by self-employed people in the higher rate tax bracket compared with those in the basic rate tax bracket.

Using the information on individual incomes in the FRS for 2007-08 reveals that about 3.1 percent of self-employed people in the UK paid tax at the 40% higher income tax rate in that tax year. Combining this with the information on highest qualification in the FRS14, I estimate that around 3.5 percent of all training undertaken by self-employed people who pay income tax is undertaken by those paying income tax at the higher rate. Assuming that the costs of training are the same across the whole distribution of self-employed incomes15, this suggests that restricting tax relief to the basic rate (currently 20 percent) for higher rate self-employed income taxpayers would save around £15 million16. Given that the reform would save so little, and would

14 The FRS highest qualification variable was created by the author using the FRS variables

EDATTN3 (which identifies adults with degree-level qualifications) and TEA (the age at which

each adult left full-time education). Adults leaving education at age 16 or 17 were assumed to

have highest qualification at GCSE (or no qualifications), while those leaving at age 18 to 20

were assumed to have highest qualification at A level. Those leaving at age 21 or above were

assumed to have their highest qualification at ‘other HE level’ unless they had a degree

according to EDATTN3. This information was combined with the individual income data in the

FRS for self-employed people to work out the proportion of basic and higher rate income tax

payers by highest qualification group, which was then mapped across to the LFS data.

15 This assumption is of course somewhat arbitrary but we have no data on the basis of which

to assume anything else.

16 The calculation proceeds as follows: start with the figure of £860 million for total tax relief

for self-employed income tax payers on their own training. Take 3.5% of this figure (our

estimate of the proportion of training undertaken by higher rate taxpayers). Then divide the

result by two (because relief would be restricted from 40% to 20%).




involve considerable extra administrative complexity, it does not really seem like a worthwhile reform to introduce.

introducing income tax relief for employees

Currently, employees are not allowed to claim back the costs of any training which they pay for themselves in their income tax return. This is in line with standard accounting practice in the UK’s income tax system for employees which permits few, if any, deductions for expenses – partly for administrative simplicity, as this means that for the majority of employees income tax can be deducted through the PAYE (Pay As You Earn) system at source, rather than each employee having to fill out a tax return.

For employees undertaking training in connection with their current job, we might feel that the current system is reasonable; after all, their employer can claim back tax relief for their training (either through corporation tax or self-employed income tax) and allowing the employee to claim income tax relief as well in these circumstances would arguably represent double counting. However, a large amount of training and/or learning not related to the current job is undertaken by people who are employees for at least part of every tax year. For example, among employees in 2009-10, around 12 percent were involved in training or education at the time of their interview which was not related to their current job17. Table 6 gives a breakdown of this group according to the wage bands used in earlier tables.

Table 6 shows that employees on relatively low hourly wages are much more likely to be undertaking training or education not related to their current job than employees on higher hourly wages. This partly reflects the fact that some of the employees undertaking training or education not related to their current job (around 20 per cent) are full-time students who are working part-time to supplement their incomes. However, even allowing for this factor, allowing

17 In terms of LFS variables, this group answered yes to QULNOW (“are you currently working

or studying towards any qualifications?”) but no to ED4WK (“in the last 4 weeks have you

taken part in any training or education connected with your job or a job you might be able to

do in the future”?)


employees to claim tax relief on the costs of non-job-related skills acquisition would still be a progressive policy (in terms of having a greater impact lower down the pay distribution).

Table 6. Non-job related training in the LFS, 2009-10

Hourly wage level Percentage of LFS employees undertaking training or education not related to their current job (%)

Under £6.00 18.5 £6.01 to £8.00 12.0 £8.01 to £10.00 10.5 £10.01 to £12.00 10.6 £12.01 to £15.00 10.8 £15.01 to £20.00 10.7 £20.01 to £30.00 9.3 £30.01 and above 6.2 OVERALL 12.3 Source: author’s own analysis of Labour Force Survey data, 2009-10

This report is not able to produce costings for the introduction of tax relief for employees for two reasons. One is that there is not enough information on the actual training costs (e.g. course fees) paid by employees undertaking training outside of a work context, as the LFS does not collect information on training or education costs, and NESS does not cover this kind of non-employer-related training. Secondly, tax relief for employees would presumably have to be based on annual income in employment over a given tax year. This is easy to extrapolate from the weekly earnings measure in LFS for people who are in regular work for the whole of the year. But for people who combine periods of work with periods of full-time study, the LFS ‘snapshot’ weekly income measure will present insufficient information to work out liabilities for tax relief.

introducing tax relief on employer NICs

One option for extending tax relief for training would be to allow businesses to claim tax relief on employer National Insurance Contributions for employees who undertake training. Employer NICs are currently paid at a rate of 12.8% for all weekly earnings above £110 per week. Using the LFS’s 13-week




training measure, I calculate that 92.6% of overall employee training in 2009-10 was undertaken by employees who earned more than £110 per week in 2009-10.18 Using the 2009 National Employer Skills Survey’s average figure for training per trainee of £3,050 per year combined with the estimate from NESS that 12.8 million workers received training, this implies a total cost of introducing employer NICs relief across the workforce of:

(12.8 million workers × 92.6% × 12.8% × £3,050)

= £4.63 billion.

Note that this employer NICs relief would apply across a much bigger proportion of the economy than does the current system of corporate tax relief. Only profit-making businesses pay corporation tax, so public and voluntary sector organisations and private sector businesses not reporting a profit (after any allowances and reliefs) cannot claim any tax relief through the CT system. By contrast, all businesses employing workers on pay of more than £110 per week (a level comfortably exceeded by someone working full time at the minimum wage) pay employer NICs.

a ‘training tax credit’ for businesses

The final option for reform which this section considers is the introduction of a ‘tax credit’ for training for businesses, along the lines of the tax credit scheme for research and development (R&D) introduced by the previous government in the late 1990s. The R&D tax credit scheme provides a subsidy for certain types of R&D spending by firms. There is a more generous rate for small firms – defined as those with under 500 employees – than for large firms. Overall in 2008-09 (the latest year for which figures are available) the R&D tax credit scheme cost the Exchequer £940 million, of which £230 million went to small firms. The Coalition Government has committed itself to “retain and build on the existing R&D tax credit scheme to create the right environment for innovative companies to prosper”19.

The R&D tax credit has the interesting feature that firms who are not making a profit can still receive a tax credit (of 24 pence per pound spent on R&D),

18 The lower threshold for employer NICs was frozen between 2009-10 and 2010-11.

19 See http://www.hm-treasury.gov.uk/consult_randd_tax_credits.htm

http://www.hm-treasury.gov.uk/consult_randd_tax_credits.htm


although the tax credit is more generous for firms in profit than for firms not making a profit. Technically this is known as a refundable tax credit – i.e. it can generate a ‘negative’ tax bill, equivalent to a subsidy to firms, even if firms are not paying corporation tax in the first place.

Introducing a refundable tax credit for firms’ training expenditure would be a relatively easy reform to implement as the apparatus for delivering tax credits to firms is already in place, thanks to the R&D tax credit system. It would be relatively straightforward to amend the R&D tax credits scheme to include relief for expenditure on training as well. Given the link between workforce skills and innovation, this would seem like an intuitively sensible move.

For profit-making firms, the current R&D tax credit scheme allows tax relief of 175 percent of R&D costs for SMEs and 130 percent for larger firms. By way of illustration, a tax credit of 130 percent on the direct training costs undertaken by corporation tax-paying firms (see Table 1) would cost around £550 million in addition to the tax relief already being claimed (i.e. 30 percent of the £1.81 billion already claimed in tax relief by these firms). If firms not making a profit were allowed to claim a tax credit as well then the cost would be significantly greater than this (exact figures would depend on the amount of training being undertaken by loss-making firms compared with profit-making firms and the generosity of the credit for loss-making firms). The current R&D tax credit scheme applies only to companies paying corporation tax and not to businesses run by sole traders or partnerships which pay income tax.

The main drawback of the tax credit system as it currently stands is that the forms are complicated to fill in – especially for small firms – and so take-up is not as good as it might be.

summary of the advantages and disadvantages of different reform options

Table 7 below provides a summary of the different options for reforming the tax credit system, with the expected cost (if calculable), advantages and disadvantage of each. It is important to note that that the policies are not mutually exclusive, and could be combined with each other. For example, restricting the rate of tax relief to training which leads to a qualification could be introduced at the same time as a tax credit for training. Hence this table should be seen as a range of options that might be complementary to each other rather than an “either/or” choice.




Table 7. Evaluating options for reform of tax relief

Reform Approximate estimated cost/saving

Advantages Disadvantages

Restrict tax relief to training which leads to a qualification (perhaps in conjunction with other types of accredited training, e.g. CPD)

Maximum saving of £5 billion if tax relief is restricted to training which leads to a qualification only

Tax relief is better targeted on training that delivers increases in productivity; Reform saves money; The remaining relief has a more progressive distributional impact than the current system

Perhaps too restrictive; Makes training that does not qualify for the relief less financially attractive to businesses than is currently the case

Restrict the rate of tax relief on income tax for self-employed people to the basic rate of tax (20%)

Saves £20 million Reduces the proportion of tax relief going to high income self-employed people

Introduces extra complexity into the tax system for relatively small cost savings

Introduce Income tax relief for training which employees pay for themselves

Some extra costs - difficult to calculate precisely

Impact would be progressive

Adds additional complexity to the income tax system because claimants would have to fill in tax returns

Introduce relief on employer NICs for employees undertaking training

Costs £4.63 billion Applies to a wider proportion of businesses than current corporation tax relief

Expensive

Introduce a training tax credit for companies alongside the R&D tax credit

A 130% tax credit would cost £550 million for companies currently paying corporation tax. Impact on companies not paying corporation tax is hard to calculate

Could apply to a wider proportion of businesses than current corporation tax relief Could use existing R&D tax credit admin system

Claim process is currently quite fiddly


Overall, restricting the rate of income tax relief looks relatively unpromising given the limited Exchequer savings which it would produce. Restricting tax relief to training which leads to a qualification, and possibly also accredited CPD training courses, saves a lot of money, and results in better targeting. Relief on employer NICs, and the introduction of a corporation tax credit for training expenditure, both widen out the scope of tax relief to a lot of companies who do not currently benefit from it. However, both schemes are potentially expensive.

One option for delivering better-targeted tax relief within a similar expenditure envelope to the costs of the current system could be to combine the restriction of tax relief to qualification-related training (and possibly also CPD courses) with the introduction of employer NICs relief and/or a training tax credit. This would target tax relief better on training that delivers the highest returns in terms of increased productivity, but would also maintain the generosity of the existing tax relief system. Extending tax relief to training which income taxpayers fund themselves which is not related to their current job would also help extend tax relief to a wider range of trainees but at the cost of increasing the complexity of the income tax system (because more income taxpayers would have to fill in tax returns)



Section seven

7 conclusions and recommendations

This report estimates that tax relief on training through the corporate tax and income tax systems costs the Exchequer almost £5 billion per year. As a mechanism for delivering financial support for work-related training, it is much more generous than any direct subsidy scheme for work-related training (particularly since the abolition of Train to Gain). However, it is important to note that the estimates of the value of tax relief in this report are necessarily imprecise because of the difficulties of combining data on training undertaken by companies and self-employed people with data on their tax payments to estimate total tax relief claimed on training.

The current system of tax relief delivers a large quantity of financial support but there are arguments for using that money more effectively, particularly in the current tight fiscal climate. In particular, three arguments stand out.

Firstly, there is a strong case for focusing tax relief on training that delivers high returns (in terms of percentage increases in earnings, and/or some other measure of labour market effectiveness such as productivity, employability, or continuing personal development). Secondly, reform should be targeted to increase the progressivity of tax relief if possible (e.g. by helping relatively low-skilled and/or poor people more than high-skilled and/or rich people.

Thirdly, it would be good to make some kind of tax relief or other assistance with training costs available to a wider range of firms and/or individuals. The current system of tax relief only directly helps companies registered for corporation tax and self-employed business owners. Public and voluntary sector organisations are not covered. Of course, these organisations do not pay corporation tax; but they do pay other taxes related to business activities, such as employer National Insurance Contributions.

With these aims in mind, this report recommends the following reforms to the tax relief system:

• Reforming the system of tax relief so that is is more clearly focused on the most effective training courses. This could be done by restricting tax relief to training courses that lead to an accredited qualification, plus certified



CPD courses.

• Introducing relief on employer National Insurance contributions for training undertaken by employees. This would provide financial support for training for all employers, including public sector and voluntary sector organisations as well as private sector companies who do not earn enough net profits to pay corporation tax. Given that restricting income and corporation tax relief to courses which lead to a qualification would save about £4.5 billion, introducing relief on employer NICs would be a good way of recycling some or all of the money saved by restricting corporation and income tax relief while helping a wider range of businesses. NICs relief would be more widely applicable and easier to administer than a tax credit for training which is another option this report looked at to extend tax relief.

• At the moment it is not possibly to make an unequivocal positive recommendation that income tax relief be extended to employees (or people temporarily not in work) who fund their own training, because the data are not good enough to give much information on the likely costs and distributional impacts of such a measure, as well as the compliance cost impact resulting from a larger number of people having to complete income tax returns. Nonetheless, it would be good for the Government to investigate this option further.

In addition to the recommended reforms above, this report also recommends that the Government start to collect and publish reliable statistics on the extent of tax relief on training. There are two obvious ways of doing this. If corporation tax and income tax returns were amended so that businesses had to provide an estimate for the total amount of training undertaken by their employees (or themselves if self-employed) over the tax year, this would make it possible to produce a very accurate aggregate measure of the value of tax relief. Alternatively, a question could be added to NESS on the extent to which each employers’ training activities reduced their corporation or income tax payments, which would enable a survey-based estimate of the same statistic. Finding a way to produce reliable estimates on the value of tax relief on training to businesses and self-employed people would be an important contribution to debates around the reform of government policies to promote workplace training.



Section eight

8 references

Becker, G (1994), Human Capital (3rd ed.) Harvard: National Bureau of Economic Research.

BIS [Department for Business, Innovation and Skills] (2009), Economic Impact of Training and Education in Basic Skills, National Research and Development Centre for Adult Literacy and Numeracy, Institute of Education, University of London. BIS Research Paper No 6: October 2009. Online at www.bis.gov.uk/assets/biscore/corporate/migratedd/.../b/bis-rp-006.pdf

BIS (2011), ‘Further Education Statistical First Release, January 2011’. http://www.thedataservice.org.uk/statistics/statisticalfirstrelease/sfr_current/ (accessed February 2011).

Blundell, R, Dearden, L. and Meghir, C (1996), The Determinants and Effects of Work-Related Training in Britain. London: Institute for Fiscal Studies.

Brown, N, Corney, M and Fletcher, M (2009), Research into Investment in Adult Learning Part 2: Updated Conceptual Framework and Investment From All Sources, Nigel Brown Associates. Briefing Paper produced for Schuller and Watson (2009).

Dearden, L, Reed, H and Van Reenen, J (2006), ‘The Impact of Training on Productivity and Wages: Evidence from British Panel Data’, Oxford Bulletin of Economics and Statistics, Vol 68, No 4, pp 397-422.

Felstead, A et al (2007), Skills At Work, 1986 to 2006. University of Oxford: SKOPE.

Further Education Data Service (2011),

HM Treasury (2010), Spending Review 2010. Cm 7942. London: The Stationery Office.

Learning and Skills Council (2010), Train to Gain Employer Evaluation: Sweep 5 Research Report. Coventry: Learning and Skills Council.


http://www.thedataservice.org.uk/statistics/statisticalfirstrelease/sfr_current/


Public Accounts Committee (2010), Train to Gain: Developing the Skills of the Workforce. House of Commons Public Accounts Committee, 6th Report from 2009-10 Session. London: The Stationery Office.

Schuller, T and Watson, D (2009), Learning Through Life: Inquiry into the Future for Lifelong Learning. Leicester: NIACE (National Institute of Adult Continuing Education).

Stevens, M (1994), ‘A Theoretical Model of On-the-Job Training with Imperfect Competition’, Oxford Economic Papers, Vol 46 No 4, pp 537-562.

Tamkin, P (2005) The Contribution of Skills to Business Performance. Brighton: Institute for Employment Studies.

UKCES [UK Commission on Employment and Skills] (2007), The Distribution and Returns to Qualifications in the Sector Skills Councils, Research Report No 21. Online at http://www.ukces.org.uk/the-distribution-and-returns-to-qualifications-in-the-sector-skills-councils-research-report-21

UKCES (2009), Ambition 2020: World Class Skills and Jobs for the UK. London: UKCES. Online at http://www.ukces.org.uk/publications-and-resources/browse-by-title/ambition-2020-world-class-skills-and-jobs-for-the-uk

UKCES (2010a), The Value of Skills: An Evidence Review. Evidence Report 22. London: UKCES.

UKCES (2010b), National Employer Skills Survey for England 2009: Main Report. London: UKCES. Online at http://www.ukces.org.uk/reports/national-employer-skills-survey-for-england-2009-main-report-evidence-report-23


http://www.ukces.org.uk/the-distribution-and-returns-to-qualifications-in-the-sector-skills-councils-research-report-21

http://www.ukces.org.uk/the-distribution-and-returns-to-qualifications-in-the-sector-skills-councils-research-report-21

http://www.ukces.org.uk/publications-and-resources/browse-by-title/ambition-2020-world-class-skills-and-jobs-for-the-uk



http://www.ukces.org.uk/reports/national-employer-skills-survey-for-england-2009-main-report-evidence-report-23

http://www.ukces.org.uk/reports/national-employer-skills-survey-for-england-2009-main-report-evidence-report-23


Section nine

9 appendix - detailed calculations of the value of tax relief on training in the UK

This Appendix presents estimates of the value of tax relief on training in the UK using recent data from the following sources:

• HMRC corporate tax statistics, in particular Table 11.3 (online at http://www.hmrc.gov.uk/stats/corporate_tax/11-3-corporation-tax.pdf)

• BIS small business statistics for 2009 (http://stats.bis.gov.uk/ed/sme)

• National Employer Skills Survey data for 2009 (http://www.ukces.org.uk/upload/pdf/NESS%20main%20report_1.pdf) and 2007 (readingroom.lsc.gov.uk/.../national/nat-nessurvey2007mainreport-may08.pdf)

• Family Resources Survey data for 2007-08.

For the most part the data are taken from the 2009-10 tax year but the tax rates used are taken from the current tax year (2010-11) to give the most up-to-date possible estimates of the value of tax relief on training.

To a large extent, the methodology used here is based on research undertaken by Brown, Corney and Fletcher (2009) in their briefing paper for the Inquiry Into the Future of Lifelong Learning (IFLL), but using more up-to-date data, and with some minor improvements or revisions to certain calculations (for example the calculation of relief at different tax rates for self-employed people).

estimating training expenditure in the UK using NESS

In order to estimate the value of tax relief on training in the UK, it is first necessary to estimate total expenditure on training. The National Employer Skills Survey (NESS), a bi-annual survey of employers most recently


http://www.hmrc.gov.uk/stats/corporate_tax/11-3-corporation-tax.pdf

http://www.ukces.org.uk/upload/pdf/NESS%20main%20report_1.pdf


conducted in 2009, is the best source for information on training expenditure. Total training investment by all types of enterprise in the NESS is £39.2 bn (NESS 2009, p 171). I use calculations from Corney et al (2009) based on specially-provided supplementary information from the 2007 NESS20 to break this figure down into training expenditure by private for-profit companies, charitable and voluntary sector organisations, and central and local government organisations. Of these, only private for-profit companies pay Corporation Tax and therefore they are the only type of organisation that attract tax relief for training in this form.

Unfortunately the NESS only covers England. Therefore, I have used information from the Office for National Statistics (ONS) on the number of employed people in the whole UK (including England, Scotland, Wales and Northern Ireland) compared with the number of people in England to inflate the estimate of total expenditure to a UK-wide figure. (This of course assumes that expenditure per head on training is the same in the other countries making up the UK as it is in England, which I have chosen as the default assumption in the absence of any data on this question.) These calculations are shown in the lower half of Table A.1.

training expenditure for enterprises not covered by NESS

Table A.1 gives an estimate of training expenditure for enterprises covered by NESS, but there are some for-profit enterprises who are excluded from NESS sampling and we need to make an estimate of training for these types of enterprises as well. The rules for inclusion or exclusion from NESS are as follows:

• All enterprises with more than one employee (or whatever type) are within the scope of NESS.

• All partnerships come within the scope of NESS, even if they have no employees separate from the partners. Legally, a partnership must consist of at least two people.

20 The author was unable to obtain an updated breakdown on training expenditure by type of

establishment from the 2009 NESS, so the figures from the 2007 NESS have been used

instead in this case.


appendix - detailed calculations of the value of tax relief on training in the UK


Table A.1 Information on training expenditure by type and size of

enterprise in NESS

Amount Source Total training investment £39.2bn NESS 2009, P171 Training investment by type of company:

Private for-profit sector £31.3 bn Calculations based on Corney et al’s supplementary analysis of NESS

2007 data, broken down into private for-profit (79.8%),

charitable/voluntary sector (11.4%), Public sector (8.8%)

Charitable/ voluntary sector £4.5 bn Central and local government £3.5bn

Total expenditure on training by private for-profit enterprises covered by NESS in England

£31.3 bn See calculations above

Multiplying factor, England employment → UK employment

1.131 ONS employment statistics

Total expenditure on training by equivalent enterprises in the UK to those covered by NESS in England

£37.1 bn Expenditure on training by companies in England

× multiplying factor

Sources: see right hand column of table

• Self-employed businesses with one or more employees are within the scope of NESS and therefore their training investment is already within the NESS total.

• Companies and sole proprietorships with no employees are definitely excluded from NESS.

• Companies with a single employee may well be excluded from NESS, either on the basis that they are companies with no employees where the owner-manager chooses to take a salary as well as dividends, or where there is a sleeping partner. Following Brown et al (2009) I have assumed that these companies are excluded from the NESS training expenditure totals.


Table A.2 presents data on the number of enterprises in the UK from BIS (2010) broken down into companies, partnerships and sole proprietorships and by number of employees.

Table A.2. Data on UK enterprises by legal status and number of

employees, 2009

Number of employees Type of enterprise

0 1 to 4 More than 4 Total

Companies 552,915 424,855 322,620 1,300,390 Partnerships 273,780 116,925 53,545 444,250 Sole proprietorships

2,787,280 253,825 48,300 3,098,405

Source: BIS (2010).

Based on the figures in Table A.2 and the other assumptions on the previous page about the scope of NESS, my estimates of the number of enterprises falling outside the scope of NESS are as follows:

• 552,915 companies with no employees;

• (424,855/4) = 106,214 companies with one employee (assuming that one quarter of companies in the “1 to 4 employees” category in the BIS data do in fact have only one employee);

• No partnerships with no employees or one employee;

• 2,787,820 sole proprietorships with no employees;

• No sole proprietorships with one employee (by definition).

Following Corney et al, I assume that the annual training propensity for single person enterprises is 40%21.

The assumed average training expenditure for single person enterprises who undertake training is assumed to be £5,450 (the same as the NESS 2009

21 Unfortunately it is not possible to use the Labour Force Survey covered in Section 5 to

obtain a precise estimate of the training propensity for single person enterprises because the

LFS only asks about training in the three months prior to the survey (rather than a whole year).




figure for expenditure per employee for establishments with fewer than 5 employees – NESS 2009, Figure 7.8).

Multiplying the figures above for the number of enterprises with no employees or one employee by the assumed annual training propensity of 40% and the average training expenditure of £5,450 gives figures for total estimated investment in training by type of single person enterprise detailed below in Table A.3:

Table A.3. Estimated investment in training by type of single-person

enterprise

Type of enterprise No employee One employee TOTAL Companies £1,154m £254m £1,408m Sole proprietors £6,539m £0 £6,539m TOTAL £7,693m £254m £7,947m Source: Table A.2 combined with figures on training propensity and average training expenditure discussed above.

Table A.4 shows the split in NESS between employees and self-employed people for various types of enterprises. To derive these numbers it is necessary to make various assumptions about the average number of employees in each enterprise, which are shown in the right hand column. The data on the number of enterprises in each case is taken from Table A.3 above.

The following assumptions are made about investment in training per employee in the firms covered in Table A.4:

• For partnerships and sole proprietors with one to four employees I assume that the investment in training per employee is £2,344, the average for all establishments in NESS 2009 with two to four employed people22;

• For partnerships and sole proprietors with five or more employees we assume that the investment in training per employed person is £1,708, the average for all establishments within NESS;

22 Note that this figure includes the establishments in NESS who do not undertake any

employee training and hence is lower than the figure for training expenditure per employee in

establishments which undertake training.


• For partnerships of just two self-employed people with no employees we assume that the investment in training is £2,484, the same as for sole proprietors with no employees, and

• For all those organisations already within NESS we assume that the self-employed proprietor or partners make equal investment in their own training as for each of their employees.

Table A.4. Split in NESS between employees and self-employed people

for various types of company

Enterprise type employees Self-employed

people

Total number of businesses

(from Table A.2)

Source

Sole proprietors 1-4

employees

444,000 254,000 254,000 Breakdown derived using BIS SME statistics and 2009 NESS data

Sole proprietors 5+

employees

444,700 48,300 48,300 Breakdown derived using BIS SME statistics and 2009 NESS data

Partnerships no employees

0 615,000 273,780 All partnerships of just two self-employed people

Partnerships 1-4 employees

172,688 292,313 116,925 Assume on average that each partnership is two people

Partnerships 5+ employees

716,365 160,635 53,545 Assume on average that each partnership involves three people

Sources: see right hand column

By combining these assumptions on investment in training per person with the figures in Table A.4 we arrive at the figures shown below in Table A.5 for the distribution of UK-wide investment in training between the self-employed themselves and their employees.




Table A.5. Estimated UK-wide investment in training for enterprises in

NESS 2009 operated by self-employed people and their employees (£m)

Organisation by size and type Investment in employees

Investment in self-employed

partners or sole proprietor

Total

Partnerships, no employees 0 1,341 1,341 Partnerships, one to four employees 405 685 1,090 Partnerships, five or more employees 1,224 274 1,498 Sole proprietorships, one to four employees 1,041 595 1,636 Sole proprietorships, five or more employees 760 82 842 Total 3,429 2,978 6,407 Source: authors’ calculations based on NESS 2009 and Table A.4

The final result from Table A.6 implies that the figure of £37.1bn for overall investment in training in the UK by for-profit organisations in NESS established in Table A.1 breaks down into £6.4bn of training by sole proprietors and partnerships and £30.7 bn of training by companies with one or more employees.

Table A.6. Total investment in training in the UK inside and outside of

NESS 2009 (£bn)

Organisation In NESS

Outside NESS

TOTAL Tax regime

Private for-profit companies 30.67 1.44 32.11 Corporation tax

Self-employed and partnerships (investment in employee training)

3.43 n/a 3.43 Income tax

Self-employed and partnerships (investment in own training)

2.97 6.08 9.05 Income tax

Source: author’s own calculations


This implies that total investment in training in the for-profit sector of the UK economy – including enterprises included in NESS, and those outside it – breaks down as indicated in Table A.6.

estimating corporation tax relief

The calculation of the overall amount of corporation tax relief requires the following information (shown in Table A.7 below, together with the derivation of each figure).

Table A7. Information on Corporation Tax Payments required to estimate

Tax Relief

Piece of information Estimate Corporation tax Total number of companies registered for CT (including those making losses

1,884,000

Number of companies paying CT (before reliefs) 915,000 Proportion of CT-paying companies paying at main rate

15%

Proportion of CT-paying companies paying at small firms rate

85%

Source: HMRC Corporate Tax Statistics, Table 11.3

Using these figures, we can derive the following results:

Proportion of companies making a profit = 915,000/1,884,000 = 48.6%;

We assume that the proportion of employees working in firms making a profit is also 48.6% (in the absence of any statistics on the relationship between company size and profitability).

Assuming that training is evenly spread across the population of firms (in the absence of any statistics on the relationship between training propensity and profitability), expenditure on training by companies making a profit

= £32.11bn (from Table A6 above) × 48.6%

= £15.60bn;

CT relief at small firms rate

= £15.60bn × proportion of CT-paying companies paying at small firms rate × small firms rate of CT




= £15.60bn × 90% × 21%

= £2.95bn;

CT relief at main rate

= £15.60bn × proportion of CT-paying companies paying at main rate × main rate

= £15.60bn × 10% × 28%

= £0.44bn;

Total corporation tax relief = £2.95bn + £0.44bn

= £3.38bn.

estimating income tax relief

To work out income tax relief for self-employed business owners there is a further complication, as self-employed income tax payers can claim for their own training costs as well as costs of training for their employees. However, they can only claim for the direct costs of their own training (e.g. costs of hiring external trainers) and not for income foregone while training.

To work out the proportion of training expenditure by self-employed people to support the development of their own businesses which is eligible for income tax relief, we need to break training down into on-the-job and off-the-job training. The 2007 NESS (Table 7.4) states that for establishments with 2 to 4 employees (the smallest size covered in NESS), 42.6% of training was on-the-job and 57.4% was off-the-job. (Unfortunately the on-the-job/off-the-job split was not repeated in the 2009 NESS and so the 2007 NESS figures are the most recent available in this case).

NESS 2009 (Table 7.5) states that 62.0% of on-the-job training costs, and 35.4% of off-the-job training costs, are attributable to direct training costs (on which tax relief can be claimed by this group) with the rest attributable to income foregone as a result of undertaking training (where tax relief can’t be claimed for this group). On these assumptions, combined with the figure of £9.05bn for total training investment by self-employed people and partnerships (from Table A.6 above), the investment by self-employed people in training for themselves for the development of their own businesses which


is eligible for income tax relief can be determined as shown in Table A.8 below.

Table A.8. Calculation of training investment (£bn) by self-employed

people to support the development of their own businesses that is

eligible for income tax, 2009

Off-the-job training

On-the-job training

Total

Total 3.86 5.20 9.05 Direct Training Costs 1.47 3.36 4.82 Income Foregone 2.39 1.84 4.23 Source: author’s own calculations

Total training expenditure on which tax relief is payable is £4.82 bn. In terms of the marginal rates which self-employed people pay income tax at, analysis of the 2007-08 Family Resources Survey (carried out for section 4.2 of the main report) shows that 3% of self-employed people pay income tax at the higher rate, 84% at the basic rate and the rest do not earn enough to pay income tax, or make losses. From this, we calculate tax relief for own business training costs as follows:

Tax relief at basic rate = £4.82bn × 84% × 20%

= £0.81bn;

Tax relief at higher rate = £4.82bn × 3% × 40%

= £0.04bn;

Total tax relief for own business training costs = £0.81bn +£0.04bn

= £0.85bn.

The other element of income tax relief for self-employed taxpayers is relief on the training costs of the employees of self-employed people. In this case the amount eligible for relief is the total cost including the foregone wages of trainees. The relevant figure is therefore total investment in employee training by the self-employed of £3.43bn from Table A.6 above. Calculating tax relief at the basic and higher rates of income tax in the same manner as the calculation of relief for self-employed people’s own training costs shown above gives a figure for total tax relief for employee training costs of £0.61bn (i.e. £610m).




estimate of total tax relief

Hence, our total estimate of tax relief on training in the 2010-11 tax year is as shown in Table A.9 below:

Table A.9. Estimated value of tax relief on training for 2010-11

Element Value (£bn) Corporation tax relief for companies 3.38 Income tax relief for self-employed people on their own training

0.86

Income tax relief for self-employed people on employees’ training

0.61

Total 4.86 Source: author’s own calculations

Table A.10 below uses further information from NESS 2009 on the breakdown of overall training costs into direct training costs, the foregone wages of trainees, and the management of training programmes to split the £4.86 bn figure into tax relief on direct training costs (assumed to include management costs) and trainee wages. The results are that direct training costs account for £2.90 bn of training costs, with £1.96bn accounted for by trainee wages.

Table A.10. Breakdown of training costs in direct training costs and

foregone wages of trainees

Element of costs

Proportion of total

costs (NESS

2009), %

Corporation tax relief

(£bn)

Self-employed

income tax:

Own training

(£bn)

Self-employed

income tax:

Employee training

(£bn)

TOTAL (£bn)

Direct training costs (incl. management)

51.0 1.73 0.86 0.31 2.90

Trainee wages 49.0 1.66 n/a 0.30 1.96 TOTAL 100.0 3.38 0.86 0.61 4.86 Source: author’s own calculations

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