EXPLANATORY NOTE

1. This clause provides for vocational training relief to be phased out. Firstly, higher rate relief is removed so that for payments made on or after 6 April 1999, relief will be given at basic rate only. Vocational Training relief will then be withdrawn altogether in 2000-01, when the national framework for Individual Learning Accounts is launched. This will allow support for training from public funds to be better targeted so that in future more help will go to those who have the greatest need to improve their basic skills and qualifications. The final date for making payments which attract vocational training relief will be announced nearer the time.

2. Vocational training relief has been criticised for subsidising expensive hobbies such as flying and diving rather than supporting genuine vocational training. More than a quarter of the £36 million tax relief given in 1997-98 went on supporting these two activities. The immediate removal of higher rate relief for vocational training will go some way to tackling this and is the first step towards the total abolition of vocational training relief.

3. The complete withdrawal of vocational training relief will be timed to coincide with the roll-out of the national framework of Individual Learning Accounts (ILAs), which will then become the main source of assistance for adults acquiring qualifications. ILAs will provide a 20 per cent discount for everyone, on eligible training costs of up to £500 a year, and 80 per cent discounts on the costs of certain key courses, including computer literacy. The first "starter" accounts will open in 1999-2000 and, for each of the first million ILAs, the Government will provide £150 for spending on education and training when the holder commits a minimum of £25.

4. To encourage employers to invest in their employees’ training, contributions made by employers into ILAs held by their employees will qualify for a deduction from taxable profits and will be tax and NICs free in the hands of their employees, provided employers contribute to the ILAs of their lowest paid workers on similar terms. Any legislation necessary to achieve this will be brought forward next year.

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5. Subsection (1) provides for subsection (2) of section 32 of the Finance Act 1991 (vocational training relief) to be amended so that the rate of tax relief, which was previously given at the taxpayer’s marginal rate of tax, is restricted to the basic rate only. It achieves this by changing the way the relief is given. Previously, payments for vocational training relief were treated as deductions in calculating the trainee’s total income for income tax purposes. These changes allow the relief to be given as a free standing reduction in the trainee’s tax liability.

6. Subsection (1) also inserts new subsections (2A) - (2B) into section 32. These new paragraphs will only apply where relief is not given at source, so they will not affect the majority of trainees. Those trainees who pay fees to non-UK providers cannot get relief at source however, and so they have to submit claims to get tax relief. In those circumstances, relief will still be given at basic rate, but new subsection (2A) limits the relief by the extent to which the trainee is otherwise liable to tax. The new relief can therefore do no more than reduce the trainee’s tax liability to nil. New subsection (2B) ensures that vocational training relief, which is not transferable, is given before other tax reliefs. This ranking will work to the advantage of the trainee, if for example, he or she is also entitled to married couple’s allowance, which can be transferred to his or her spouse.

7. Subsection (2) withdraws vocational training relief altogether by repealing sections 32 and 33 of the Finance Act 1991.

8. Subsection (3) provides for the restriction to basic rate relief to take effect from 6 April 1999, which is why we need resolution 27 under the Provisional Collection of Taxes Act 1968. It also provides for the complete abolition of vocational training relief from an appointed day after 6 April 2000 (to be determined by Treasury Order) which is why Future year resolution (j) is needed.

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9. Vocational Training relief is the relief available to individuals who pay for certain costs of their own training. Most trainees get relief at source by deducting an amount equal to income tax at the basic relief from the fees they pay to UK training providers. Training providers then reclaim that amount directly from the Inland Revenue. Previously, trainees could claim any higher rate relief due from their local tax offices or in their Self Assessment returns. Payments made on or after 6 April 1999 will no longer qualify for relief at higher rate.

10. There are two ways of qualifying for relief:

a) VTR is due if the course being taken is capable of leading to a National Vocational Qualification or Scottish Vocational Qualification (NVQ or SVQ) and the trainee is at least 16 years old and, if under 19 years old, not in full time education in a school.

b) VTR is also due for non NVQ/SVQ linked training provided the course provides skills or knowledge which are relevant to, and are intended to be used in, paid employment or self employment. The trainee must be 30 or more years old at the time of the payment and the course must be full time, lasting for at least four weeks but no more than a year. All teaching and practical applications must take place in the UK.

11. To qualify for VTR, trainees must be resident in the UK, not be in receipt of any other form of tax relief for the fees and not be receiving, or entitled to receive, public financial assistance for the course. Trainees must pay for the training themselves and not be undertaking the course either wholly or mainly for recreational purposes or as a leisure activity.

12. It has proved very difficult to ensure compliance with this last condition because trainees self-certify that they qualify for relief. This has led to wide-scale abuse, with many people claiming tax relief for courses that are claimed to be vocational yet for most are purely recreational. Claims for relief in respect of payments for flying, diving, horse riding and Cordon Bleu cookery courses are typical examples of where the course can, on the rare occasion, be vocational but for most is a hobby.