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Umbrella Company

Umbrella companies became popular in the UK after the UK Government introduced the ‘IR35 legislation’ – IR35 is also referred to as intermediaries’ legislation. The legislation defines a set of rules that have an impact on the National Insurance (NI) contributions and taxation of an individual in case they are contracted to work for a patron through an intermediary. An umbrella company acts as an employer for the contractor who opts to work under a fixed-term contract assignment in the UK. In other words, an umbrella company is a limited company which operates as an agency on behalf of various contractors catering to various industrial sectors. A contractor is a person who prefers to be self employed and works on multiple assignments at one time for various companies across various industries, rather than working for one specific company. However, there are circumstances when organisations are reluctant to work directly with such self-employed contractors and prefer than an invoice is issued via a limited company. Under such conditions, an umbrella company comes handy and it offers self-employed contractors with the flexibility to carry out routine work and the umbrella company will generate an invoice for the organisation on behalf of the contractor. An umbrella company will use a pay-as-you-earn (PAYE) system to pay a contractor, thereby, treating them as a short-term or provisional employee of the company. Apart from the commission charges imposed by an umbrella company, the contractor will also be subject to NI contributions and applicable amount of tax

What is Umbrella company

Having the ability to offset expenses against tax bill is a major enticementany contractor to join an umbrella company. However, it is a contractor’s responsibility to ensure that he / she only file-in a claim for items that are permissible for tax purposes. All expenses claimed should be in-line with HM Revenue and Customs (HMRC) guidelines and all proofs should not be fictitious or non-allowable items

Definition of a temporary workplace

An individual is entitled to claim various travel and continuation expenses while performing his / her duties as a ‘provisional or temporary employee at a temporary workplace’. A temporary workplace is defined as a work-place which a contractor attends to perform tasks for his / her clients.As an umbrella company contractor, a contractor will take onsuccessive short-term projects or assignments onsite at the client’s main place of work. It is imperative to claim travel and subsistence expenses for a period less than 2 years at one particular location. In case the contract date is extended beyond two years, all expenses will be filled before to comply with HMRC regulations. Work at one location for more than two years alters the definition of a temporary workplace and for tax purposes changes from ‘temporary’ to ‘permanent’.DNS Accountants has had it simple for our clients to work as contracts and haveprepared a list of expenses that contractors are entitled to claim whilebeing an employee of an umbrella company.

Allowable expenses you can claim through Umbrella Company

List of allowable expenses through Umbrella Company

  • Additional meal costs
  • Charitable donations
  • Equipment
  • Eye Tests
  • Insurances
  • Pension Contributions
  • Personal Incidental Expenses (PIEs)
  • Professional Subscriptions
  • Protective Clothing
  • Secondary accommodation costs
  • Training
  • Travel
  • Working from home

Costs or rental at a secondary accommodation

A contractor can claim for accommodation if he / she isstaying away from their permanent address during the course of business assignment or business travel. This also implies if a contractor is attending training related to work. to be able to claim the expenses, an umbrella company will in general need a receipt that includes the secondary accommodation’s name, address and telephone number (usually, an invoice will have all these basic information mentioned on it)

Cost incurred while under training

Unless a contractor is able to justify the training expenses which are linked to their existing contract, there are very remote chances that such expenses can be claimed

Medical needs – Eye examination

If a contractor is performing a job which puts strain on their eyes, he / she is eligible to claim the cost incurred for eye tests. Such jobs include working on a personal computer (PC), laptop or tablet as part of the everyday job. Glasses and contact lenses are also permissible on this basis

Equipment

A contractor may be able to claim for equipment expenses if he / she can prove that the equipments are imperative for effective work and form an essential part of their current assignment

Pension Contributions

Contractor can effective invest in pension schemes to saves taxes upto 54%. Pension payments are subtracted by an umbrella company and enable a contractor to build on their savings thereby, saving the amount payable as taxes

Personal Incidental Expenses (PIEs)

These expenses include the cost of a morning newspaper or a call made to the place of residence from a telephone. A contractor can claim up to £5 per night if he / she isworking in the UK and up-to £10 per night outside the UK

Protective Clothing

If a contractor is required to wear shielding clothes as part of his / her job, he / she may be able to claim the cost of such expenses. However, in case these protective clothing can be worn outside the workplace, there are chances that they will most likely be disallowed

Professional subscriptions

During the course of work, a contractor may require certain subscriptions to work more efficiently. To enable a contractor work effectively, subscriptions from professional and trade associations are considered as allowable business expense. The membership to such bodies must be HMRC recognised

Travel expenses

Contractors can claim their work travelling expense provided these expenses meet the definition of a temporary workplace. A contractor can claim 45p per mile for the initial 10,000 miles and post that 25p per mile in a given tax year. The mileage allowance covers car servicing and taxes; petrol expenses; insurance charges; and other additional running costs associated with the vehicle. In case a contractor uses a motorbike to travel for work, he / she can claim 24p for each ‘business’ mile and 20p per mile if he / she prefers to cycle to work. Alternative, if a contractor is travelling as a passenger to the office in a car, he / she isentitled to claim 5p per mile. Additionally, London congestion charges and car parking charges also form part of allowable expenses

Billable and non billable expenses

A billable expense is defined as a reimbursement for cost incurred by a contractor and is paid to an umbrella company by the end client as an addition to the normal labour invoice. The nature of the expense will determine whether it can be paid back to a contractor before tax from the umbrella company. On the other hands, a non-billable expense is incurred by a contractor and is not charged to end client as an addition to the normal labour invoice

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