What to do about employers’ tax relief on training?
In the current environment of fiscal austerity, most areas of government spending – including financial support from the government for work-related training – are under unprecented scrutiny. The training policy which carries the highest costs to the Exchequer – much more than subsidies for apprenticeships, for instance – is tax relief on employer-provided training. This consists of relief on employees’ training costs and foregone wages for corporation tax (for incorporated businesses) and income tax (for businesses run by self employed people), plus self-employed people’s own training costs.
At Today’s TUC/unionlearn “Skills Investment” seminar in Congress House, I will be outlining the results of a recent research project carried out by Landman Economics, funded by unionlearn, which looks at the extent of current tax relief on training and the options for the future.
The government does not publish official estimates of how much tax relief is worth to businesses, but my calculations using data from the National Employer Skills Survey and HMRC statistics suggest that tax relief reduced businesses’ tax payments by around £4.9 billion in the 2010/11 tax year. This amount comprises relief on the cost of training itself (£2.9 billion) and relief on the wages foregone by employees undertaking training (£2.0 billion).
Given the amount of government revenue foregone in tax relief for training, it makes sense to ask whether the current arrangements are the most effective use of public funds. My research used data from the UK Labour Force Survey about which employees and self-employed people are training (by earnings level and qualifications) to assess the likely costs and distributional impacts of a number of different options for reform.
The analysis resulted in a recommendation for two major reforms to tax relief.
First, corporation tax and income tax relief on training should be restricted to training which leads to an accredited qualification, or other accreditation such as Continuing Professional Development. This would reduce the costs of tax relief by up to 90% of its current total cost, and would target relief better on training that delivers increases in productivity, with a more progressive distributional impact than the current system.
Second, relief should be introduced on employer NICs for employees undertaking training. The cost of this measure would roughly offset the savings from the restriction of coporation tax and income tax relief to accredited qualifications. Employer NICs relief would be claimable by a much wider range of organisations than can claim current tax reliefs – including public and voluntary sector employers.
The final recommendation from the project is that the government should publish statistics on the extent of tax relief claimed by businesses each year – based either on survey data or administrative data from (modified) tax returns. Given that this is the single most expensive training support policy in the UK, despite my recent research we still know remarkably little about which businesses are claiming it, and what its overall effects are in encouraging training. Better data would help researchers address this question in much more detail in the future.