Since 6th April 2016, Supervision, Direction and Control (SDC) has restricted the tax relief that contractors working through an umbrella company are allowed to claim. Our blog explains what expenses you can claim through an umbrella company.
What expenses can umbrella employees claim?
If you are new to contracting or are used to operating through a limited company, one of the first questions you may be considering will be about the types of expenses you can claim through an umbrella company.
Before April 2016, umbrella employees were able to take advantage of a wide variety of expenses to reduce their tax bill. Although not an exhaustive list, here are some of the common thing’s contractors claimed tax relief on:
- Training and subscriptions
- Mobile phone
- Clothing or equipment
A significant change to expense claims by umbrella contractors resulted from the Supervision, Direction and Control (SDC) rules which took effect from April 2016. The government introduced the legislation as they believed several umbrella organisations had been abusing the travel and subsistence expense rules, and many contractors were operating in a similar way to a permanent, full-time employee.
If the work you are doing is very similar to the working practices of a permanent employee, you will be subjected to SDC. As a result, you will not be able to claim tax relief on travel and subsistence expenses.
SDC was introduced by the government to try and identify contract workers who were unfairly benefitting from tax relief. Ultimately, it’s aim was to ensure umbrella workers operating in a very similar way to permanent employees could not take advantage of tax relief – because the permanent employees couldn’t.
Do the rules only apply to umbrella employees?
Contractors operating through a limited company are able to claim a broader range of expenses. However, what they can actually claim depends on their IR35 status.
What is Supervision, Direction and Control?
Simply put, the definitions for SDC are:
- Supervision – someone is overseeing the work or assignment to ensure it is completed to the required standard. Supervision also applies if someone is helping you to develop your knowledge and skills set.
- Direction – someone is giving you guidance as to how the work should be carried out. This also includes coordinating the assignment or project as a whole.
- Control – someone is dictating what work needs to be done. Control also includes having the ability to move a contractor from one job to another.
How is SDC determined?
To determine if SDC applies to a worker, HMRC will look at the terms of engagement. For example, what has been agreed in regards to the role and how the work is carried out. A mobile worker test or questionnaire determines this.
What are reimbursed expenses?
Despite the SDC changes to expenses, you may still be able to claim back costs incurred in your line of work, in the form of reimbursed expenses. Reimbursed expenses are a tax-free allowable business expense which your client has agreed to pay for in advance. For example, if you are required to travel away from your main place of work, your client may agree to reimburse you for the cost of travel.
If your umbrella company allows reimbursed expenses, they will have an exact procedure in place which you will need to follow – but please be aware, this may differ between providers. You must submit a valid receipt for any reimbursed expense claims made, and it is advisable to keep a record of these in case HRMC asks to see evidence of a claim in the future.
Beware of unlawful umbrella companies advertising vast expense claims
There are hundreds of umbrella companies operating in the UK, and the marketplace is very competitive. To tempt customers, some umbrella providers may include expenses that are part of your take home pay illustration, which increases your take home pay. However, once you register, you may find you are not able to claim these expenses as you are subject to SDC.
Sadly, there are also a few non-compliant providers who are promoting illegal models, mainly focussing on poor practices around travel and subsistence claims. To get around the legislation, they will claim that you are not subject to SDC so they can continue making use of expense rules; or will even try to use non-compliant payment arrangements such as loan schemes.
Be wary of umbrella companies allowing you to make vast expense claims. It is likely that contractors working through an umbrella company are subject to SDC, and therefore, are not able to claim tax relief on everyday expenses.
Always use a compliant provider for your payroll
HMRC has stepped up their efforts in recent years to close tax loopholes and reclaim underpaid tax from contractors who have engaged in tax avoidance schemes. We strongly recommend using a compliant provider to process your payroll to ensure you do receive a large tax bill in later years.
If you are interested in registering with an FCSA accredited umbrella company – look no further. Umbrella Company UK is a PAYE umbrella company backed by over 20 years’ experience in contractor payroll. Our compliance with HMRC’s regulations is second to none, and you can rest assured you are in safe hands!