Can you claim expenses through an umbrella company?

Contractors working through umbrella companies were hit hard by changes in legislation concerning claiming expenses. Starting on the 6th April 2016, HMRC introduced legislation that significantly reduced the number of contractors able to claim tax relief on travel and subsistence expenses. In fact, umbrella workers are usually not considered for expense claims. Nevertheless, working through an umbrella company remains a popular choice for contractors and freelancers, especially those working in the public sector. (Updated 5th June 2019)

After 6th April 2016

HMRC decided to change the rules for umbrella workers because it was believed that a majority of contractors and freelancers working through umbrella companies were being treated the same as full-time employees by their clients. Because workers in full-time employment are unable to claim tax relief on travel and subsistence, HMRC thought it unfair that contractors working through an umbrella company were able to. As a result, Supervision, Direction and Control (SDC) was created.

HMRC considers every contractor working through an umbrella company as being under supervision, direction and control, unless the contractor can prove the contrary.

What is Supervision, Direction and Control (SDC)?

HMRC decided that if a contractor is subject to SDC, they are not able to claim tax relief on travel and subsistence. How do HMRC define SDC?

Supervision – applies when you are being overseen at your place of work to make sure you are carrying out your tasks. If you are receiving help, advice or guidance from anyone in your place of work, this can count as supervision.

Direction – applies when you are being given clear instructions, guidance or assistance on how to carry out your tasks.

Control – applies when you are directly being dictated to in the workplace, and you are required to do as asked to correctly carry out your assignment. For example, if you are asked to move from location to location (whether inside an office or externally), or you are told to do additional work outside your contractual terms, you are under control.

To find out more, please visit the HMRC website.

Are there any exceptions to the ruling?

HMRC acknowledges that not every client treats their temporary workforce like full-time employees. As a result, there is a test that contractors and clients can use that can help determine whether a contractor is subject to SDC. However, experience has shown that 99% of contractors will not pass this test and therefore it is rarely executed by umbrella companies. As a general rule of thumb, compliant umbrella companies will not allow reimbursed expenses or expenses for contractors who believe they are not subject to SDC.

What is the rule for mobile workers?

Mobile workers who are required to travel to different places of work throughout the day (e.g. head office where they are based) could normally claim expenses, however as this is rarely the case for umbrella workers, it is not possible.

Travel expenses

Travel expenses may have included:

• Travel required in order to carry out the agreed requirements of an assignment
• Travel to a place of work or travel from a place of work (excluding commuting)
• Travel between the workers home and a temporary place of work (from home to the temporary site and from a temporary site back home)

Subsistence expenses

Subsistence expenses may have included costs that arise during a business trip for the sole purpose of the contract work being undertaken. This would include:

• Food
• Drink
• Accommodation

Can you claim allowable expenses?

Even if you believe you are outside SDC, you unfortunately cannot claim any expenses through an agency. If you have any questions about these, please call us on 01707 871622.

Who is liable if a contractor has been wrongly claiming expenses?

If a contractor is found to be wrongly claiming expenses, the contractor and umbrella company can both be found liable and there can be a transfer of debt.

If the umbrella company has provided incorrect and misleading information and has allowed a contractor to illegally claim expenses, they can be found liable and the director(s) could be responsible for the outstanding debt, as well as further punishment from HMRC. If on the other hand, a contractor has deliberately provided incorrect information in order to bypass legislation and claim expenses, they can be found accountable for paying back the outstanding debt and could have additional penalties levied by HMRC.

Are only umbrella contractors affected by this legislation?

Contractors working through their own Personal Service Company (aka limited company) are unable to claim tax relief on travel and subsistence expenses if they are deemed to be inside IR35 legislation. This legislation affects all contractors working through intermediaries such personal service companies.

Churchill Knight Umbrella

If you are looking to work through an umbrella company, or are unsure whether to set up your own limited company, call 01707 871622 or email enquiry@churchill-knight.co.uk. We are specialist contractor accountants and PAYE umbrella payroll providers and are on hand to provide you with the support you need.