Expenses Explained

Expenses and Umbrella Services

When expenses are processed for an employee either by reimbursing the employee or paid by the employer in respect of the employee any that are not covered by the relevant exemptions in the legislation, up until 5 April 2016 must have been recorded on a form called a P11D. Receipts must be available in support of all expenses.

With effect from 6 April 2016 any taxable expenses or those that are a mixture of allowable and taxable must be paid with tax and NIC accounted for. The employee will then have to make claim for the element of allowable expenses.

All contractor’s receipts must also be retained. It is not an indication of the expenses that contractors’ are entitled to claim. To claim an expense you must have first incurred the cost and it must be ‘’wholly, exclusively and necessarily’’ incurred in the performance of your job.

Submitting Expenses

All expenses are typically submitted to the umbrella in accordance with a schedule. All expenses incurred must be supported by original receipts. If the contractor does not actually incur an expense then no cost can be claimed. HMRC require that receipts are kept for a period of up to 5 years. The only expense where a receipt is not necessary relates to the overnight incidental expenses. HMRC allows up to £5 per night for stays in the UK and up to £10 for each night, any part of which is spent outside the UK where required to be away from home during the course of an assignment.

Expenses Guide – Umbrella

These guidance notes summarise the types of expenses that may be claimed by a contractor working with an Umbrella company in order to perform his/her duties of employment.  The rules from HMRC are very specific and here is a brief overview of some expenses allowed in performing employment duties:

It is always recommended to keep receipts and only claim the exact amount on the receipt.  If you are uncertain as to whether to claim the expense, you should seek professional guidance or not claim the receipt at all.

Uniforms or Work Clothing

You are unable to claim the cost of ‘normal’ clothing however certain protective clothing which is required for you to perform your job duties (such as protective uniform) will generally be allowed as an expense.

Travel and Subsistence (Post April 2016)

As a general rule, travel and subsistence (including home to work travel) is no longer an allowable expense.  The rules on travel and subsistence expenses changed effective 06 April 2016 which restricted tax relief on these expenses due to employees being under SDC (Supervision, Direction & Control).  In certain instances such as site-site travel or certain care workers travel costs may still be allowable.  Home to work travel would be disallowed.

VDU Eye Tests/Spectacles

If a contractor is required to use VDU equipment he/she may claim the cost of the examination (eye) test. Reasonable costs are typically reimbursed where the examination shows that a contractor requires corrective appliances with specific prescription to use for screen equipment. Where no corrective appliance is required the cost of the examination only can still be claimed.

Work-related Training

If a contractor has incurred costs on work-related training courses he/she will need to provide details of the costs incurred.  Subject to the expenses being ‘work-related training expenses’ a contractor in some instances may claim reimbursement of such costs. The training would need to be associated as a necessary expense in the performance of the current duties.

Pensions

Tax relief for pension expenses is normally allowable however pensions requirements are complex and further advice should be sought from a Pensions advisor.

Other

Expenses such as equipment necessary to perform your duties, personal incidental expenses whilst away on a work assignment, overnight accommodation when away from your workplace may be allowable.  These would need to be assessed individually.

 

Umbrella Companies

Fundamentals

An Umbrella Company will employ you in a similar way to any other employer. You will be a permanent employee engaged to work on a number of assignments. You will be provided with a Contract of Employment under the Employment Rights Act 1996 granting you full employment rights.

The Umbrella Company contracts with your client or agency and takes care of all the administration matters.

Umbrella services are used by many contractors because they provide a simple, cost effective and flexible operating structure.

The contractor becomes an employee of the umbrella under a contract of employment. The contractor enjoys the benefits of employment but still retains the flexibility of contracting. The umbrella contracts with the recruitment agency, or directly with the end client (if no recruitment agency is involved). All income is paid out through the PAYE tax system. Contractors working through an umbrella will usually submit their timesheets to the umbrella.

The umbrella will then raise an invoice based on the agreed rate and submit this to the agency or end client for payment. Timesheets must usually be submitted within a set time frame to ensure prompt payment to the contractor. Usually any claims for any allowable expenses the contractor has incurred are submitted with the time sheet. The ability to claim expenses is one of the main advantages for the contractor working through an umbrella as opposed to directly through the recruitment agency. However with new rules introduced since 6 April 2016 the ability for certain contractors to claim travel and subsistence expenses is now restricted.

The contractor is also usually offered a higher rate much like a contractor engaged through their own limited company. This is because the rate should reflect that employers Nl, holiday pay and statutory benefits have been passed on to the umbrella business.

The umbrella will take care of all the administration, tax and payroll work for the contractor and provide insurances within the fees of the service to cover the contractor working on an assignment.

Important points to consider:

  • You will be taxed on the PAYE basis.
  • Your total income will be subject to earned levels of income tax and National Insurance Contributions.
  • Your rights as an employee, depending on the contract with the Umbrella might include:
    • Sick pay
    • Holiday pay
    • Redundancy rights
    • Unfair dismissal rights
    • Age/sex discrimination rights
    • Grievance rights
    • Rest breaks
    • Maternity/paternity/adoption pay and leave
    • Pension provision
    • Health and safety legislation adhered to by your employer
    • A written contract of your rights and obligations setting out the terms under which you have both entered into the employment relationship.