Employer payments whilst training taxable as earnings

In Dorothy Johnson v HMRC [2021] TC08346, the First Tier Tribunal (FTT) dismissed a claim that a nurse’s salary paid during a university training period was non-taxable scholarship income. The individual had remained employed throughout and the payments were taxable earnings.

In 2003 Dorothy Johnson, a nurse, undertook a university course in midwifery under a hospital initiative to incentivise nurses to specialise.

• The scheme undertook that the nurses’ pay would remain the same whilst they were training.
• The course consisted of classroom time and hospital placements.
• The hospital trust (Barts NHS) who continued to employ her during her course (and until retirement in 2016) made payments to her during the course described as living expenses which were taxed under PAYE. These were paid on top of her salary.
• Ms Johnson claimed a refund of PAYE and National Insurance Contributions (NICs) under the Widening Access Training Scheme (WATS) on the basis that the salary and living expense payments she received during the training period were non-taxable scholarship income under s.776 ITTOIA and therefore automatically exempt from NICs.
  • At that time the guidance about the scheme did not clearly state the requirement for the income to be scholarship income of an individual in full-time education.
  • She asserted that her employment ceased when she commenced the training, she then became a student, her employment resuming when the training ended.
• HMRC refused her repayment claim stating that the payments were taxable earnings under s.62 ITEPA 2003.

The FTT dismissed the appeal:

• The evidence showed that Ms Johnson had remained an employee of Barts NHS throughout her training period. During this time she continued to participate in a superannuation scheme and receive benefits that were only available to employees.
• The income received during the training period was not distinct and identifiable as scholarship or bursary income and was earnings. S.776 only applies to scholarship or bursary income held by an individual in full-time education, and she was not as she remained a salaried employee.
• As a result, NIC’s also applied to the income.

Ms Johnson's employer denied her WATS repayment claim based on updated HMRC guidance issued six months after her application which clearly explained that employees who received a salary and employment benefits could not claim. The trust admitted that this had caused incorrect refunds to be processed for other individuals which were not required to be repaid.

Part of Ms Johnson’s appeal to the FTT was that there had been inconsistencies in processing repayment applications and the process was unfair. She also questioned the legality of HMRC guidance changes and of the PAYE deductions made from her income during the training period.

The FTT confirmed that it did not have the power to adjudicate matters of legality or fairness. Its function is to interpret legislation and the guidance relied on by Ms Johnson did not have the force of law. If the tribunal could and did allow her refund this would be perpetuating an error which it could not do.

Useful guides on this topic

Training and course fees
Can you receive tax relief on the cost of training? Can employees' obtain tax relief on training?

Training and course fees (self-employed)
Can a self-employed trader claim tax relief on their costs of training and on-going development? Are training fees capital by nature?

External link

Dorothy Johnson v HMRC [2021] TC08346