One of the first things you may ask if you are considering joining an umbrella company is – what specific expenses can be claimed against your income tax bill?
Despite what you have heard to the contrary, you can only claim tax relief on expenses you have incurred solely and exclusively in the course of performing your contract work.
The expense rules are relatively complex, so we’ve provided this concise guide to help guide you through a 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 of common things contractors can claim tax relief on:
- 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).
- Costs of relocation resulting from your contract role, e.g. flights.
- Stationary and printing costs.
- 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, 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 affect by the SDC rules (see below).
Check with your umbrella company administration team if you are unsure whether or not you can reclaim a specific expense against your tax bill.
Supervision, Direction and Control – April 2016 onwards
A significant change to expense claims by umbrella contractors resulted from new so-called SDC rules which took effect from April 2016. If you are deemed to be under the ‘supervision, direction and control’ of your client at a given contract placement, you can no longer claim tax relief on travel and subsistence claims.
The Government decided that a number of umbrella-type organisations had been abusing the prevailing travel and subsistence expense rules, and introduced a blanket ban on such claims, meaning that professional contractors have been penalised due to the actions of some unethical payroll companies in other industries.
In essence, if the way you work is very similar to the working practices of a traditional ’employee’, you are likely to be inside the SDC definition.
For more on the definition of SDC, visit the HMRC website.
How do expense claims actually work?
If your client has agreed in advance to pay for for specific rechargeable expenses you have incurred whilst on contract duty, they will reimburse you, and you won’t receive tax relief on the amounts – as you are not out of pocket.
For the majority of allowable expenses you will typically incur as a contractor – such as buying a new laptop, or software, you will not be reimbursed as such, but the amount you have spent on legitimate expenses will not be taxable.
For example, if you earn £4,000 (gross) for a month’s contract work, and spent £1,000 on a computer, only £3,000 of that month’s contract earnings will be subject to normal taxation. The £1,000 element consists of a legitimate business expense, and no tax is charged on it.
Your umbrella company will have a clear procedure in place to deal with expenses. Typically, you will need to upload any expense claims each week / month.
Although you can submit mileage claims (if not under the SDC of your client) and receive tax relief in your umbrella company’s next payment cycle, you should be aware that you cannot claim tax relief on all business expenses directly via your umbrella company.
You may need to claim tax relief on most expenses at the end of the tax year by submitting a Form P87 to HMRC, or submitting the claim via the Self Assessment process. Your umbrella will be able to help you with this, and may well complete the form on your behalf.
Although some umbrella companies may claim to have a ‘special expenses dispensation’ from HMRC which will somehow benefit you more than alternative umbrella schemes, these are bogus claims. HMRC only grants dispensations to certain companies to enable them to process expenses more efficiently.
You can read our full guide to umbrella company expenses dispensations for the complete picture.
What about IR35?
As an umbrella company ’employee’, the IR35 tax legislation will not be a concern, as you are taxed as an employee of the umbrella scheme. You will only be affected by the IR35 rules if you are working via a limited company.
The most important thing to remember is that you can only claim for things you have actually paid for – they must have been incurred as part of fulfilling your contract duties.
You must also keep full records of all the expenses you claim throughout the year, and make any claims within 4 years of the end of the tax year in question.
The rules governing expense claims, particularly HMRC documentation, are complex. So, if you have any questions at all, get in touch with your account manager as soon as possible. Also, take a look at this Government guide: tax relief for employees.