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Can your business pay your child’s university fees tax free?

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24 November 2011

With tuition fees for universities in England increasing to £9,000 per year from September 2012, some businesses are being encouraged to offer tax free scholarships to the owner’s children. However because of the restrictions surrounding family scholarships this idea is unlikely to work in practice. 

For a long time employee scholarships have allowed businesses to pay scholarships to individuals in full-time education without the individual suffering income tax.  The aim of the scheme is to encourage large companies to support employees’ wanting to study. Given the imminent hike in university tuition fees it is understandable that smaller family owned businesses want to try and use the scheme to help their children. However there are several problems with this idea, such as:

  1. Where a scholarship is given to a relative of the business owner the payment will be treated as a benefit in kind and as such will suffer income tax and national insurance under the normal rules.  
  2. Where a scholarship has been set up in the interests of a director rather than for business purposes the costs will not be deductible for corporation tax. 
  3. HMRC are likely to scrutinise any scholarships given to directors’ family members to check they are being taxed correctly.

It is sometimes suggested that family businesses may be able to get around the above problems by setting up cross scholarships with other family businesses. It is very likely that HMRC would seek to look through such arrangements and in practice therefore, they would probably be more hassle than they are worth.

Summary
Unless you are a large company offering employees scholarships for bona fide commercial reasons you are unlikely to benefit from the tax free status of employee scholarships.

If you want to talk about alternative ways in which your business could save tax please call Ruth Dooley on 01452 634800 or email her at ruth.dooley@hazlewoods.co.uk.