Umbrella Company Expenses
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Umbrella Companies. But what umbrella company expenses can you claim?
In this comprehensive guide, we delve deep into the heart of umbrella companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions and remain compliant.
Umbrella Company Expenses
Claiming expenses while working through an umbrella company is virtually impossible. Since April 2016, HMRC legislation has severely restricted what expenses contractors can claim while inside IR35.
While expenses can technically still be reimbursed, you cannot offset them against your earnings like you can while working outside IR35 through a limited company. Similar to permanent employees, all expense claims must be submitted, approved by the client, and paid in addition to your regular contract income.
No umbrella company can legally process anything other than client billable expenses for tax relief purposes. Any umbrella company that actively promotes otherwise should be avoided as they are almost certainly behaving unethically.
Can I Claim Expenses While Working Through An Umbrella Company?
The easiest way to think about umbrella company expenses is to consider yourself a permanent employee of the end client. If a permanent employee can ask their employer to reimburse an expense, it is likely you can also. If they can’t, you can’t.
Let’s look at an example.
As an umbrella worker, travel to and from the end client’s regular place of business (i.e. ordinary commuting) is not an allowable expense. However, if you must travel away from the end client’s principal place of work, you can ask the client to reimburse the expenses incurred.
Any exceptional travel is permitted to be reimbursed as a tax-free expense, and the costs of accommodation, where you are required to stay overnight for work, are also allowable. This mirrors the treatment of permanent employees who can claim expenses when visiting clients or performing off-site work.
Remember, these expenses do not offset your income. They are approved by the client and repaid in addition to the standard contract rate.
Claiming Expenses Via HMRC
It is worth noting that, in limited cases, if you do not have an agreement with the client to reimburse expenses, you may still be able to claim HMRC.
You can use a P87 form to submit a claim at any point in the tax year if the claim is less than £2,500; otherwise, you must submit the claim via your self-assessment tax return. You must have paid tax in the year you’re claiming for, and the amount of tax relief you receive cannot be more than the amount of tax you paid in that year.
It’s worth remembering that HMRC monitors expenses very closely, and submitting a claim could result in an inquiry as to the nature of the cost.
The SDC Assessment
HMRC apply a supervision, direction, and control (‘SDC’) test to contractors when determining whether the restrictive 2016 legislation captures them. Unfortunately, HMRC believes those employed through intermediaries, such as umbrella companies, are automatically subject to supervision, direction, and control unless proven otherwise.
As HMRC’s default assumption is that umbrella company workers are subject to SDC, the onus is on the contractor to demonstrate otherwise. HMRC isn’t prescriptive on what evidence they would find persuasive in considering whether this test is met, although they have made it clear that signed statements aren’t sufficient.
Where it is considered that the legislation doesn’t apply because the SDC test is not met, and HMRC are involved in an enquiry, they’ll test evidence by examining relevant documents and gathering facts from all parties involved.
How Is The SDC Assessment Made?
The umbrella company usually makes the assessment in the form of a questionnaire, combined with input from the end client (if required).
Where an incorrect assessment is made, any additional taxes owed are the liability of the umbrella company unless they relied on fraudulent documents provided during the assessment process. In this case, the liability shifts to the person who provided the documents.
Where there is a determination that a role is Inside IR35, the view is that the contractor is automatically subject to SDC, even if the tests may show otherwise. This is why contractors working Inside IR35 via umbrella companies rarely claim anything other than client billable expenses.
The situation may be different for contractors choosing to work through an umbrella company while Outside IR35.