Under an umbrella company, contractors can claim back expenses they incurred working on assignment. The claiming and reimbursing of legitimate expenses is reliant upon the SDC (supervision, direction and control) status, as well as the type of assignment.
HMRC has strict guidelines and legislation governing expenses claims that umbrella companies and contractors need to adhere to, otherwise claims could be subject to income tax and National Insurance.
Following changes made in April 2016, contractors cannot claim tax-free travel and subsistence expenses if they are subject to SDC. Previously, this had been a common way to increase the worker’s take home fee.
HMRC has imposed a blanket ban on these kinds of claims, so umbrella companies cannot process tax-free expenses without first assessing the contractor’s SDC status. A contractor with similar duties and responsibilities to a permanent employee is considered to fall under SDC.
Tax processing is also similar in that travel and meal expenses have been removed from the tax-free list. Therefore, compliant umbrella companies can no longer process non-chargeable expenses for tax relief.
A worker is subject to SDC if they:
1 – Work for a manager or authority that supervises their work and can take action against them.
2 – Receive directions relating to their work from this supervisor.
3 – Are given instructions on how to complete a job by an authority.
Essentially, this means that a worker follows the instructions of a supervisor in a similar way to an employee, rather than working or making decisions on their own.
Supervision is defined as an employer having the right to check how work is done and whether it meets certain standards and specifications. Direction is defined as how an authority guides, instructs or order the worker to do the job. While control refers to both a supervisor’s control of how a job is done as well as their ability to move the worker between jobs.
The best way to determine if SDC is met is to study the contract between the client and the worker, looking at detailed job descriptions and specifications.
Salary Sacrifice Benefits and Operational Remuneration (OpRa)
Salary sacrifice refers to the benefits or expenses an umbrella company provides in return for an employee giving up a portion of their earnings or salary. This would lead to expenses and benefits being reimbursed, without tax or National Insurance being applicable, increasing the employee’s take home.
To tackle this, HMRC brought in the Operational Remuneration Arrangement (OpRa) in April 2017. OpRa applies in two instances: When an employee sacrifices the right to earnings in return for other benefits; and when an employee opts to take other benefits over earnings.
An expense that falls under these conditions cannot be reimbursed to the employee without tax and National Insurance being applicable. However, certain exclusions (such as mileage, childcare vouchers and low-emission cars) and special case benefits do not fall under OpRa.
Fixed Expense Pot
In lieu of being able to offer salary sacrifice, umbrella companies now usually run Fixed Expense Pots. This is a pre-agreed amount per hour or day set aside by the employer if the employee has regular expenses. The amount is added to the employee’s expense pot on a weekly or monthly basis and is reimbursed when the employee submits a valid receipt and claim.
In brief, a fixed amount will be retained from the amount billed each day, this is then allocated to a separate expense pot. From this, expenses incurred by an employee in the performance of their duties can be reimbursed. Expenses higher than the pot’s value cannot be reimbursed until there is sufficient money in the pot. While, if expenses are below the pot’s value, the remaining value can’t be reimbursed as an additional remuneration.
Employees should collect and file all receipts and bills, preferably in multiple copies, in case of an HMRC enquiry. HMRC enquiries can check records dating back six years, meaning that employees should save copies of receipts and bills going back this far.
In case of an enquiry, failure to provide proof of a claim can result in liability for tax expenses. Generally speaking, workers will have to upload claims on a weekly or monthly basis, according to their contractual terms with their umbrella company.
Claiming from HMRC
Contractors can apply to HMRC for tax relief on expenses incurred on assignment and not reimbursed by the umbrella company. A P87 form can be used by employees on temporary contracts, up to a maximum of £2,500. For expenses over £2,500, workers can use Self-Assessment forms to apply for tax relief.
For both Form P87 and Self-Assessment forms, expense claims can be filed with HMRC once the tax year in which the expense was incurred has ended, but must be claimed within 4 years of the end of the tax year.