Guide to Umbrella Company Expenses
As a contractor working through an umbrella company, one of the first questions you may ask will be about expenses, and in particular ‘what type of expenses you can claim?’
This may not be the news you wanted to hear, but unfortunately, the majority of umbrella employees are no longer able to claim expenses as it is deemed that they are working under Supervision, Direction and Control (SDC).
A brief history of umbrella expenses
Before April 2016, umbrella employees were able to claim tax relief on costs that were incurred wholly, exclusively and necessarily in the performance of your employment duties. The most common expenses were being claimed were travel and subsistence, but contractors were also claiming tax relief for the following expenses:
- Accommodation
- Business equipment
- Computer software
- Training costs
- Mobile phone
- Protective clothing
- Subscriptions to professional bodies
However, from April 2016, contractors and freelancers employed through intermediaries, such as umbrella companies, and are working inside IR35, are no longer able to claim travel and subsistence costs.
HMRC believes that if contractors or freelancers are providing their services through an employment intermediary, they will be subject to Supervision, Direction and Control (SDC) and should be treated in the same manner as a permanent employee (for tax purposes).
The introduction of the new legislation has seen a significant decrease in the number of contractors working through an umbrella company able to claim tax relief on travel and subsistence expenses.
What is Supervision, Direction and Control?
The government and HMRC decided that several umbrella employees were operating in a similar way to their permanent counterparts, and therefore should not benefit from tax benefits that permanent employees could not access.
Their logic was that each engagement was a separate employment contract with each workplace. Therefore, you are seen as ‘permanent’ for the duration of that contract.
The new rules on travel and subsistence are only applicable to workers who are subject to SDC and are inside IR35. If you are lucky enough to be not subject to SDC, you can continue to claim travel and subsistence expenses.
What are the definitions of Supervision, Direction and Control?
Supervision
Supervision applies when someone is overseeing the work or assignment to ensure it is being done correctly and to the desired standard. Supervision can also involve helping the person to develop their skills and knowledge.
Direction
Direction is where someone is providing guidance, instructions or advice on how you should complete the work. Someone providing direction will often coordinate how the work is being undertaken.
Control
Control refers to someone dictating what work you do and how you should do it. Control also includes the power to move the person from one job to another and prioritise tasks as they come up.
SDC applies to you if any one of the three definitions above applies to your contract.
How is SDC assessed?
Your SDC status is determined by looking at whether you are subject to supervision, direction or control whilst working on an assignment. Your SDC status is assessed for each new position you take and consists of a series of questions you must answer about your role.
Most umbrellas will not even offer you the chance to claim expenses any more
A majority of compliant umbrella companies will no longer allow travel and subsistence expenses to be claimed by their employees. And, many won’t even offer you the chance to complete a SDC questionnaire or survey. Basically, almost every contractor or freelancer found themselves subjected to SDC in some way and as a result, umbrellas have removed the burden of the SDC questionnaire from their internal processes.
If you come across an umbrella company actively promoting that they’ll allow tax relief on expenses – run like mad! The law is the law, and as we’ve mentioned above, if you’re using an umbrella, you’re almost certainly subject to SDC and legally are not entitled to them.
What are reimbursed expenses?
Don’t worry – it’s not all doom and gloom!
If you incur expenses wholly and exclusively for business purposes, you could be eligible for reimbursed expenses. Reimbursed expenses are tax-free allowable business expenses that your end client or recruitment agency has agreed to return.
For example, mobile workers who are required to travel away from their main place of work can claim travel and subsistence expenses for this work.
This is comparable to expenses a permanent employee can claim if they are required to work away from their permanent workplace and need to travel to a different location.
What expenses can you claim as a limited company director
As a limited company director, claiming expenses is a simple way to operate your business in a tax-efficient manner. Allowable business expenses reduce the amount of profit on which your company will pay Corporation Tax.
As a general rule of thumb, you can only claim for expenses that you incur wholly and exclusively during the everyday running of your business. You must make the payment through your company’s bank account, or you can reclaim the cost of the business expense if you paid it via a personal bank account.
Below are a few examples of some of the limited company expenses you can claim:
- Business insurance expenses
- Accommodation expenses
- Professional subscriptions
- Phone bills
- Equipment expenses
- Travel expenses
- Gifts, entertainment and trivial benefits
Why should you still consider using an umbrella company?
Although HMRC has tightened up on claiming expenses as an umbrella employee, there are still many benefits for contractors and freelancers using an umbrella company:
Compliance
One of the main benefits of using an umbrella company is that you do not have to worry about IR35, as tax and National Insurance Contributions (NICs) are deducted at source and paid to HMRC on your behalf.
However, for assignments that are outside IR35, you want to rest assured the provider you use is knowledgeable and can give you the correct advice. If you have an opportunity to work compliantly through a limited company (outside IR35) – go for it! It’s the best way to legally maximise your pay retention. However, for assignments that fall within IR35, umbrella companies are a good way to go.
Although there are a few questionable umbrella companies on the market, the majority are compliant and only want the best for their clients. Look for the FCSA or Professional Passport accreditation to ensure your chosen provider is ethical and abides by UK tax law.
Tax and National Insurance is paid to HMRC on your behalf
Being employed by an umbrella company is similar to being a permanent employee; you are paid via PAYE and will receive a payslip each time you are paid.
HMRC will send the umbrella company your tax code once you register, and the umbrella company will deduct the appropriate amount of tax and NICs, before paying you directly into your bank account. You will never have to worry about receiving an unexpected tax bill!
The umbrella will also handle all of the administrative tasks, such as processing payment and raising invoices – all you need to do is submit your timesheet.
Read our Umbrella Companies Explained section for more information.
Comprehensive insurance package
One of the perks of working through an umbrella company is that you will get access to comprehensive insurance, including Employer’s Liability, Public Liability and Professional Indemnity Insurance.
Continuity of employment
When you register with an umbrella company, you will sign an overarching contract of employment. Essentially, this means that you are seen as an employee of that umbrella company and can take on multiple assignments alongside each other, without being overtaxed – as your income is solely through the umbrella company.
Statutory Benefits
As an umbrella employee, you will be given access to Statutory Benefits similar to a permanent employee. These include sick pay and maternity/paternity pay.
Workplace pension
After 12 weeks of continuous employment, you will automatically be enrolled into a workplace pension. Payment is made into your pension pot each time a timesheet is processed for you, making saving for retirement incredibly easy.
Rewards
When you register with an umbrella company, they may offer you access to an employee rewards scheme. Employee rewards are a brilliant way to save yourself money when shopping online and at high street retailers, restaurants and amusement parks.
