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Umbrella company contractors who claim for expenses that they have not incurred or embellish their expense claims need to be very careful, warns a leading IT contractor accountancy firm.

The warning from SJD Accountancy follows the government's latest attack on umbrella companies.

The accountancy firm says that certain umbrella companies have always focused their marketing activities, not on the quality of their service but rather on the supposed high net income their clients can pocket through the heavy abuse of dispensations and expenses claims. For years it seemed that HM Revenue and Customs turned a blind eye to this shady practice.

However, following a recent consultation paper (PDF) issued by the Revenue, it looks like they are about to tighten up the rules for contractors, interim managers and freelancers who use employment agencies and umbrella companies to increase their net pay through the use of fraudulent expense claims.

The paper focuses on the practices of over 100 umbrella companies for encouraging contractors to claim tax relief on non allowable expenses. One such company claimed contractors would be able to pocket 85% of their contract value which is laughable under PAYE rules. HM Treasury claimed widespread abuse of the rules for travel expenses has deprived the Exchequer of £300m in tax.

In the paper, Treasury officials warned that where expenses rules are being abused, that abuse needs to be addressed. Time will tell how stringent the new rules are going to be but one thing is for certain and that is that the days of 'boosting your income' with dubious expense claims are over.

Working through an umbrella company will obviously still remain an attractive option for many contractors, which isn't surprising bearing in mind most contractors earn more than their permanent employee counterparts.

When choosing an umbrella company, SJD Accountancy says that contractors should focus on whether they believe the umbrella is an ethical company who would always provide best practice and safe advice.

Other things to look for when choosing an umbrella company are: published service levels, will the contractor get paid even if the umbrella hasn't been and do they hold any professional accreditations or are members of professional trade bodies.

As always contractors who are looking for an administration free life should look towards an umbrella solution. Whereas those who are prepared for a little more administration should look at the limited company route which remains the most tax efficient method possible.

You can also read Contract Eye's list of leading IT contractor umbrella companies.