EXPLANATORY NOTE

1. Clause 57 introduces a new training relief for employees. Contributions by employers to education or training undertaken by their employees, or former employees, who are individual learning account holders, will be exempt from tax and National Insurance contributions (NICs) if the education or training qualifies for a grant or discount from the Department for Education and Employment (or made under similar arrangements in Scotland and Northern Ireland) and the employer makes those contributions available to all employees on similar terms under fair opportunity arrangements.

2. The Government is implementing a national framework under which everybody over 19 can apply for an individual learning account. This will allow members of the workforce to adapt their skills so that they can continue to fulfil their potential in a changing working environment.

3. People in England and Wales with an individual learning account will be eligible for 80 per cent discounts on computer literacy courses and some other specific types of learning, or 20 per cent discounts on a wide range of other eligible learning activities. (Scotland and Northern Ireland will decide their own priorities for what will be regarded as an eligible learning activity). The discounts will be available from September 2000.

4. Employers are being encouraged to invest in their account holding employee’s education and training. Under existing tax rules on business expenditure, contributions by an employer will qualify for a deduction when calculating taxable profits. The new relief ensures that, provided certain conditions are met, those contributions will also be tax and NICs free in the hands of their employees.

5. Subsection (1) of the clause introduces new Sections 200E, F, G, H and J into the Income and Corporation Taxes Act (ICTA) 1988. Section 200E sets out the main requirements for exemption and Section 200F certain exclusions. Section 200G explains that employer contributions must be made under fair opportunity arrangements to be exempt. Section 200H excludes expenditure relieved by other provisions and Section 200J deals with training funded by third parties.

6. New Section 200E (1) exempts contributions paid by an employer to a provider towards the cost of qualifying education or training in respect of an account holding employee, including paying, or reimbursing the employee, for any costs related to that training.

7. New Section 200E(2) exempts for the employee both the employer’s expenditure and the benefit of the education or training from Income Tax. This means the employee will not face a benefits in kind charge where the employer pays the training provider directly. And there will be no Income Tax charge where the employer reimburses any related costs or pays a bill for those related costs on behalf of the employee.

8. New Section 200E(3) defines "related costs" to mean incidental expenses arising wholly and exclusively from undertaking the qualifying education and training. The incidental costs covered, therefore are only the additional expenses arising directly from undertaking the training, such as extra travel and additional childcare paid for or reimbursed by the employer. Preliminary or every day expenses such as routine childcare costs are not covered. Related costs may also include the costs of an assessment or examination and the costs of registering a qualification. The cost of an award, where the award is in recognition of, rather than a reward for, training achievement may also be exempt as a related cost.

9. New Sections 200E(4) and (5) define "qualifying education or training" as education or training, undertaken by employees or former employees who hold individual learning accounts, which will become eligible for grants or discounts from September 2000 when regulations to that effect are made under what is currently the Learning and Skills Bill (or under corresponding provisions in Scotland or Northern Ireland). A wide range of learning will be eligible.

10. New Section 200F(1) denies exemption to the extent that the education or training is actually for entertainment, recreation or reward. This means, for instance, that skid-pan training offered as part of the staff’s annual outing or golfing lessons offered to those sales representatives meeting sales targets would not be exempt. The use of the words "to the extent" provides for apportionment of expenditure between the genuine "training" and the "reward" elements.

11. New Section 200F(2) allows travel and subsistence costs to the same extent as if they had been incurred on business travel, either in the current office or employment, or if the account holder is an ex-employee, to the same extent as if they had been incurred on business travel in the last office or employment that was held under that employer.

12. New Section 200F(3) prevents the tax free transfer of assets to the employee under the guise of training. It limits exemption to: assets provided or made available for use only in the course of the education or training; assets used for training and work, but not otherwise to any significant extent; training materials as defined in Section 200F(5); and things made by the trainee during training, for example a cake made on a catering course.

13. New Section 200F(4) amplifies the meaning of the entertainment and recreation exclusion in new Section 200F(1) so that it is clear that the cost of leisure activities paid for by an employer remains taxable.

14. New Section 200F(5) defines "subsistence" and "training materials".

15. New Section 200G(1) provides that the exemption does not apply unless, at the time the employer agrees to incur the expenditure, there are fair opportunity arrangements in place.

16. New Section 200G(2) defines "fair opportunity arrangements" as arrangements which provide for the making of contributions towards qualifying education or training for existing or ex-employees and, in addition, provide for those contributions to be generally available, on similar terms, to all existing employees. This means that arrangements which permit employers to discriminate in favour of, or restrict the offer to, certain groups of employees, will not satisfy the criteria for exemption. The arrangements must be in place at the time the employer agrees to contribute towards the costs arising from the qualifying education or training.

17. New Section 200G(3) enables regulations to be made defining separate offices and employments of Crown servants for the purpose of establishing whether employer contributions towards the cost of qualifying education and learning satisfy the requirement that they are made available to all employees on similar terms under fair opportunity arrangements. The regulations will give the three Armed Forces and the various Government departments and agencies the ability to make their own arrangements for contributing towards the cost of qualifying education and training for their respective Crown employees. Each separate office or employment so defined will still have to make contributions generally available, on similar terms, to all existing employees to satisfy the fair opportunity arrangements provision. This will, for example, allow the Armed Forces to offer special help with the cost of retraining service personnel for civilian life. Without this provision, the contribution arrangements would have to be the same for all Crown employees, which would be impracticable.

18. New Section 200H is a tie breaker. Where possible, relief is given first under the existing provisions in Section 200B, which exempt work-related training provided by employers, and Section 588(1) which exempts retraining received around the time of leaving an employment. The new rules apply only where they offer relief which would not be available under the earlier provisions.

19. New Sections 200J(1) and (2) provide for qualifying education and training funded by a third party to be exempt to the same extent as if the employer had incurred the expenditure.

20. Subsection 2 of the clause extends Section 200A ICTA 1988 so that incidental overnight expenses paid to employees on training courses may be paid tax free in the same way as incidental overnight expenses paid when an employee is away on business.

21. Subsection 3 of the clause provides for these measures to come into force for 2000-2001 and subsequent years.

22. The long standing charging provisions of Schedule E (Income from employment) are necessarily strict to prevent payments or benefits from being provided tax free to employees.

23. In general, this means that all payments to an employee are taxable, as is the cost of any voucher which can be exchanged for goods or services. For employees earning at a rate of £8,500 or more a year and most directors, there are special provisions which tax benefits in kind and reimbursed expenses.

24. Work-related training provided by an employer, however, is already exempt from tax and NICs, as is any expenditure by the employer on any costs related to that training. This covers not only the benefit of the training but also any training or related costs met on behalf of, or reimbursed to, the employee.

25. The existing exemption covers a broad range of activities designed to develop skills and knowledge for the employment or for charitable or voluntary activities undertaken through the employment. The exemption covers a wide range of training delivery methods such as self tuition packages, computer based training or distance learning, work experiences or work placements, informal teach-ins, as well as more formal internal or external training. The exemption also covers practical as well as theoretical work-related skills or experiences. Training offered to develop leadership skills and team skills are covered as are work-related first aid and health and safety at work courses. Courses offered as part of an Employee Development Scheme are also covered. These are schemes where employees, sometimes with low skills and bad past learning experiences, are offered training in something intended to be non-threatening to improve their attitude to more focused job-related training. The existing provisions also include measures to prevent abuse so that only genuine work-related training is exempt.

26. This existing relief will cover situations where employers wish to contribute towards work-related training undertaken by their employees who are individual learning account holders.

27. The new relief, however, is necessary to pick up non work-related training, which may also fall within the definition of eligible learning for the purposes of qualifying for a discount under the individual learning accounts scheme. Although most of the conditions of the new relief echo the existing relief for work-related training, there are some extra conditions to prevent abuse given the vast array of activities this relief could potentially cover.

28. To ensure employers offer the opportunity to learn across the entire workforce, the new relief only applies if the employer makes contributions towards learning generally available to all his or her employees and on similar terms. The Revenue is working closely with the Department of Education and Employment, which has responsibility for the launch of individual learning accounts in September 2000, so that guidance on how to participate in the new scheme is issued to employers well before the launch date. This guidance will include further information on ways of satisfying the "fair opportunity arrangements".

29. To ensure the new relief does not provide an easy method of providing tax and NICs free pay, the exemption will only apply to contributions the employer makes directly to the learning provider, and not to any training expenses reimbursed to the employee. The exemption will, however, permit the employer to either pay or reimburse related costs.

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