Contractors working through umbrella companies were hit hard by changes in legislation concerning claiming expenses. Starting on the 6th April 2016, HMRC introduced legislation that significantly reduced the number of contractors able to claim tax relief on travel and subsistence expenses. In fact, contractors are automatically not considered for expense claims, unless they can prove they are entitled to them. Nevertheless, working through an umbrella company remains a popular choice for contractors and freelancers, especially those working in the public sector.
HMRC decided to change the rules because they believed a majority of contractors and freelancers working through umbrella companies were being treated the same as full-time employees by their clients. Because workers in full-time employment are unable to claim tax relief on travel and subsistence, HMRC deemed it unfair that a majority of contractors working through an umbrella company were able to. Therefore, contractors subject to supervision, direction or control (SDC) are unable to claim expenses.
HMRC considers every contractor working through an umbrella company as being under supervision, direction or control, unless the contractor can prove the contrary.
HMRC decided that if a contractor is subject to SDC, they are not able to claim tax relief on travel and subsistence. How do HMRC define SDC?
Supervision – when you are being overlooked at your place of work to make sure you are carrying out your tasks in accordance to your contract. If you are receiving assistance, advice or help from anyone in your place of work, this can also count as supervision.
Direction – when you are being given clear instructions, guidance or assistance on how to carry out your tasks.
Control – when you are directly being dictated to in the workplace and you must do as asked in order to correctly carry out your assignment. If you are asked to move from location to location (whether inside an office or externally), you are under control.
To find out more, please visit the HMRC website.
HMRC acknowledge that not every client treats their temporary workforce like full-time employees. As a result, contractors that are able to prove they are not subject to supervision, direction or control can continue to claim expenses on travel and subsistence just like they did before the changes in legislation. Genuine ‘mobile workers’ can also claim.
Mobile workers who are required to travel to different places of work throughout the day, away from their work hub (e.g. head office where they are based) can claim travel expenses.
For the minority of contractors that are legally able to claim travel expenses, these include:
- Travel required in order to carry out the agreed requirements of an assignment
- Travel to a place of work or travel from a place of work (excluding commuting)
- Travel between the workers home and a temporary place of work (from home to the temporary site and from a temporary site back home)
If you are claiming travel expenses, it is likely you will have an agreed amount with your client. HMRC has set benchmarks for travelling in your own vehicle. If you are claiming for travel on public transport, check with your employer if there is a limit to your claims.
Subsistence expenses include the expenses that arise when on a business trip. These include:
If you are claiming subsistence expenses, it is likely you will have an agreed limit with your client. HMRC has set benchmark rates, designed for employers.
If you are outside SDC and your client has agreed to pay you expenses, you must submit receipts for all of your allowable expenses via the umbrella companies online portal (Churchill Knight Umbrella has a modern and easy to use portal available at no extra cost for our contractors). You will then be reimbursed in your pay.
If you are claiming tax relief on expenses, you can upload the appropriate receipts to the umbrella company’s online portal and these can be stored until it is time for you to process your self-assessment tax return.
You and your client will have come up with an agreement on how much you will receive per mile for the allowable mileage expenses. You must record your mileage per timesheet. Get in contact with your recruitment agency to discuss with them how they record this information and to make sure they invoice your client with the correct amount.
Both the contractor and the umbrella company can be found liable and there can be a transfer of debt.
If the umbrella company has provided incorrect and misleading information and has allowed a contractor to illegally claim expenses, they can be found liable and the director(s) could be responsible for the outstanding debt, as well as further punishment from HMRC. If on the other hand a contractor has deliberately provided incorrect information in order to bypass the legislation and immorally claim expenses (e.g. stating they are not under SDC when they know they are), they can be found accountable for paying back the outstanding debt and any further punishments from HMRC.
No. Contractors working through their own personal service company are unable to claim tax relief on travel and subsistence expenses if they are considered to be inside IR35 legislation. This legislation affects all contractors working through employment intermediaries and this includes umbrella companies and personal service companies.
If you are looking to work through an umbrella company, or are unsure whether to set up your own limited company, call 01707 871622 or email email@example.com. We are specialist contractor accountants and PAYE umbrella payroll providers and are on hand to provide you with the support you need.
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