Contractors' training position 'unchanged' by suspension of ILAs

Individual Learning Accounts (ILAs) have been closed down by the Government amid reports of fraud and corruption, although the Paymaster General had previously used their existence to justify the lack of tax relief on training for contractors.

However, the Government has claimed that their suspension will not affect the situation for contractors as they remain in the same position as direct employees regarding training.

When IR35 was launched, one of the contentious issues was that the five per cent limit on contractors' 'expenses' would be inadequate for training provisions and therefore, contractors would again be at a disadvantage compared to larger companies.

At the time, the Paymaster General attempted to justify this by pointing to the ILAs.

The Paymaster General's statement, posted to the Inland Revenue's website, was as follows:

'There have been suggestions, especially from IT and engineering consultants, that expenses for 'work related training' should be an allowable deduction in the calculation of the minimum amount of tax and National Insurance Contributions that workers with service companies should pay, if their engagements meet the accepted definition of employment.

'Our intention is that workers in service companies should be in the same position as employees with regard to what help they can get with training they pay for themselves. At present employees can claim tax relief for certain costs of their own vocational training. This tax relief is being withdrawn when Individual Learning Accounts (ILAs) are launched next year. ILAs will introduce a range of discounts and grants for eligible learning. Anyone, including a service company worker, will be able to open an ILA. No deduction for training is therefore appropriate for service companies in calculating the minimum salary for tax and NIC purposes.

'I announced, on 23 September, that a five per cent flat rate deduction for expenses would be allowed on top of all the other expenses, which will normally be available to an employee. This deduction will be available even where the worker is only involved in contracts which meet the definition of employment, and carries out no other business at all. The five per cent deduction is in recognition that there are costs associated with running a service company. It is for the service company to decide how best to use the five per cent deduction and that choice could be to provide for the worker's training needs.

'We believe that we have struck the correct balance.'

Now that ILAs have been suspended and IR35 remains unchanged, UKTECH asked Ms Primarolo where this would leave contractors as regards her assurance that an alternative means of training would be provided in her previous statement.

A spokesperson for Ms Primarolo replied: "The position for service company workers is unchanged following the withdrawal of Individual Learning Accounts. Our intention remains that service company workers should be in the same position as direct employees with regard to what help they can get with training they pay for themselves. Individual Learning Accounts have been withdrawn across the board so service company workers are still in the same position as direct employees with regard to any training costs they incur personally."

• Ms Primarolo's statement on the Inland Revenue website has since had the following message placed above it since UKTECH's enquiry: 'ILAs have been suspended. This does not affect the principle of training costs being treated the same way when incurred by direct employees or by service company workers in employment type contracts.'
• Individual Learning Accounts were introduced in the 1998 budget as a way of tackling the skills shortage. Over 2.5 million people had taken out an account before the scheme was withdrawn in England.
• The scheme offered everyone in the UK up to £200 as a concession against any learning course, including basic IT courses.
• The scheme has so far cost more than £200 million.
• A number of people alleged to have taken advantage of the scheme were recently arrested by the National Crime Squad under investigation for 'serious fraud.'
• Estelle Morris, Education and Skills Secretary, has said the Government needs to find a way of introducing a new look Individual Learning Account since announcing their withdrawal in England.
• The ILA scheme will continue to be available to individuals in Scotland, Northern Ireland and Wales.