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 that operates as an agent 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 that an invoice is issued via a limited company. Under such conditions, an umbrella company comes in front, and it offers self-employed contractors 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 the applicable amount of tax.
Having the ability to offset expenses against tax bills is a major attraction that influences a contractor to join an umbrella company. However, it is a contractor’s responsibility to ensure that they only file 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
- 24 months rule
- List of allowable expenses through Umbrella Company
- Is it necessary for you to keep expense receipts?
Definition of a temporary workplace
Individuals are entitled to claim various travel and subsistence expenses while performing their duties as a ‘provisional or temporary employee at a temporary workplace’. A temporary workplace is defined as a work-place where a contractor attends to perform tasks for their clients. As an umbrella company contractor, a contractor will take on successive short-term projects or assignments onsite at the client’s main place of work.
24 months rule
A temporary workplace is one that satisfies the 24-month rule; in other words, it is one where employees work or are anticipated to work for less than 40% of the time over any 24-months. Travelling from home to a permanent location of employment does not qualify as business travel, and the company cannot recover the expense of these journeys. It is imperative to claim travel and subsistence expenses for a period of fewer than 24 months at one particular location. In case the contract date is extended beyond two years, all expenses will be filled before complying 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’. We have made everything simple for our clients to work as contractors and have prepared a list of expenses that contractors are entitled to claim while being an employee of an umbrella company.
List of allowable expenses through Umbrella Company
- Additional meal costs
- Charitable donations
- Eye Tests
- Pension Contributions
- Personal Incidental Expenses (PIEs)
- Professional Subscriptions
- Protective Clothing
- Secondary accommodation costs
- Working from home
Costs or rental at a secondary accommodation
Contractors can claim accommodation if they are staying away from their permanent address during the course of business assignments or business travels. 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).
The Cost incurred while under training
Unless a contractor can justify the training expenses linked to their existing contract, there are very remote chances that such expenses can be claimed.
Medical needs – Eye examination
A contractor performing a job that puts strain on their eyes can 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.
Contractors may claim for equipment expenses if they can prove that the equipment is imperative for effective work and form an essential part of their current assignment.
The Contractor can make an effective investment in pension schemes to save 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. contractors can claim up to £5 per night if they areworking in the UK and up to £10 per night outside the UK.
If a contractor is required to wear shielding clothes as part of their job, they may 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.
During the course of work, a contractor may require certain subscriptions to work more efficiently, and these subscriptions from professional and trade associations are considered an allowable business expense. The membership to such bodies must have recognition from HMRC.
Contractors can claim their work travelling expense but these expenses must 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, they can claim 24p for each ‘business’ mile and 20p per mile if they prefer a cycle to travel for work. Alternatively, if a contractor travels as a passenger to the office in a car, they are entitled to claim 5p per mile. Additionally, Londons congestion charges and parking fees are considered permissible travel expenses. Anything exceeding a 5p per mile allowance is subject to tax and National insurance contribution. Additionally, the traveller must be an employee, and the journey must be for business purposes.
Unlike AMAP, you cannot claim tax relief on the difference if your employer pays you less than 5p per mile to carry a passenger.
|Mode of transport||First 10,000 business miles per year||Above 10,000 business miles per year|
|Cars and vans||45p||25p|
Billable and non-billable expenses
A billable expense is defined as reimbursement for the 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 hand, a non-billable expense is incurred by a contractor and is not charged to end-client as an addition to the normal labour invoice.
Is it necessary for you to keep expense receipts?
Yes - You should always retain receipts for any costs you intend to claim. These should be retained for at least of six years following the financial year, as HMRC reserves the right to audit any cost claim at any time. Most umbrella firms will require receipts.
If you are investigated and cannot produce receipts or other evidence of your expenses, you may be asked to repay any tax owed. You may even face tax evasion charges; therefore, its worth retaining all records to prevent paying too much tax or incurring the consequences of claiming unjustified expenses.
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