One of the first things you may ask if you are considering joining an umbrella company is – what business expenses can I claim?
As an umbrella company employee, the expenses you can claim are limited and subject to specific rules. This is mainly due to Supervision, Direction, or Control (SDC) legislation introduced in 2016.
Expense rules are relatively complex, so we’ve provided this concise guide to help you navigate the maze of legislation and ‘grey areas’.
Typical Business Expenses
So, what are the valid business expenses you can typically claim as an umbrella company contractor?
Although not an exhaustive list, here are some common things contractors can claim tax relief on. Importantly, your eligibility to do so will be affected by your SDC status.
- Business equipment if specifically required under the terms of your contract.
- Computer software, if necessary for your contract work.
- Executive pension contributions to an HMRC approved scheme.
- Business phone and mobile call costs (only the purely business element of any bills can be claimed).
- Subscriptions to HMRC-approved professional bodies (please note that IPSE membership cannot be claimed).
- Training costs (purely for contract purposes).
- Protective clothing and similar (if specifically required for your contract role).
- Costs of an eye test (for computer-related roles).
- Accommodation costs when working temporarily away from home.
- Subsistence costs when working away from home.*
- Mileage costs whilst on contract duties.*
- Parking, toll, and congestion charges related to an allowable travel-related claim.*
- Travel expenses to and from a temporary workplace or as part of your contract role.*
* You can only claim tax relief on travel and subsistence expenses if your placement is not affected by the SDC rules (see below).
It is worth noting that these cannot be claimed directly via the umbrella company. You must claim via self-assessment or a coding notice change from HMRC.
Supervision, Direction and Control – April 2016 onwards
New SDC rules that took effect in April 2016 significantly changed the scope of expense claims by umbrella contractors.
If you are deemed to be under your client’s ‘supervision, direction and control or the right thereof’ at a given contract placement, you can no longer claim tax relief on travel and subsistence claims.
The Government decided that several umbrella-related organisations had abused the prevailing travel and subsistence expense rules and introduced a blanket ban on such claims.
In essence, if your work practices are very similar to those of a traditional ’employee’, you are likely to fall within the SDC definition.
For more on the definition of SDC, visit the HMRC website.
How do umbrella expense claims work?
If your client has agreed in advance to pay for specific rechargeable expenses you have incurred whilst on contract duty, they will reimburse you.
You won’t receive tax relief on the amounts—as you are not out of pocket as long as the expenses are receipted—but the umbrella should still ask to see these.
If your client provides you with an expense allowance, say £250 per month in expenses, your umbrella should check the receipts to confirm the actual costs you have incurred.
If the employee can only provide receipts for £200, then the additional £50 can still be processed, but it will be taxed accordingly in line with your salary as it would be deemed a taxable benefit.
It is worth noting that if you cannot claim certain expenses via your umbrella, you may still be able to claim tax relief on some expenses at the end of the tax year by submitting a Form P87 to HMRC or via self assessment.
Your umbrella company will have a clear procedure for handling expenses, so check with them if you have any questions.
What about IR35?
As an umbrella company employee, the IR35 tax legislation does not apply to your contract work. You are only affected by the IR35 rules if you work through a limited company.
Further information
The most important thing to remember is that you can only claim for things you have paid for. Any costs must have been incurred as part of fulfilling your contract duties.
You must also keep complete records of all the expenses you claim throughout the year and make any claims within four years of the end of the tax year in question.
The rules governing expense claims are complex, as you can see. If you have any questions, contact your umbrella as soon as possible.
Also, read this Government guide: tax relief for employees.
Thanks to Lucy from Clarity Umbrella for validating the information contained within our guide.