Umbrella company expenses – what can you claim for?

If you work via an umbrella company, you may still incur work-related expenses while carrying out your assignment. Here, we look at how expenses are treated for tax purposes.

In the past, some rogue umbrella companies abused the prevailing HMRC expense reclaim rules, encouraging their employees to make illegitimate claims and sometimes pocketing funds from their clients.

New strict rules, which came into effect in April 2016, have limited umbrella company employees’ ability to claim expenses.

Supervision, Direction and Control (SDC), and its impact on the industry

In 2016, new Supervision, Direction and Control (SDC) legislation went live. These robust rules prevent umbrella company employees from claiming tax relief on most business expenses, including travel and subsistence.

Workers in permanent employment don’t have access to the same tax breaks, and as a result, SDC was arguably the government’s way of levelling the playing field for all workers.

The legislation had a massive impact on the sector. Claiming tax relief on travel and subsistence expenses was one of the major benefits of using an umbrella company. However, SDC meant that many who used umbrellas could no longer take advantage of the tax relief.

SDC is assessed based on three key factors:

Supervision

An umbrella employee is considered to be under supervision if they must report to a senior staff member. Supervision can also mean that a senior team member can take disciplinary action if necessary.

Direction

Direction means that the umbrella employee is given instructions on how to complete their work. If a manager on the site has the authority to direct the worker on specific aspects of their job, direction applies.

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Control

An umbrella employee is subject to control if they can be moved around by someone at their workplace or told to stop what they’re working on and start something else. Control can also apply if a worker is moved between tasks or locations.

SDC will always apply to some jobs

In practice, most umbrella workers will be considered under SDC, particularly in client-led environments.

The SDC rules will always apply to some jobs because a senior team member will have instructions that involve supervising, directing, or controlling other staff members.

For example, if you are a teacher, driver, social worker, or nurse, you’re almost certainly subject to SDC.

Some umbrella companies also consider those earning lower wages automatically ineligible to claim expenses, assuming these workers are under SDC.

How do umbrella companies approach SDC?

Umbrella companies usually handle SDC in two ways: either they have a strict SDC questionnaire in place, or they prevent all employees from claiming tax relief on expenses.

As the name suggests, an SDC questionnaire is a series of questions that workers must answer about their assignment. It’s imperative that they are honest.

Once all the questions are answered, the umbrella company will then carefully assess the responses and decide whether SDC applies.

In the improbable event that the worker’s responses indicate they’re not subject to SDC, the umbrella will investigate further by reviewing the contract and discussing the working arrangements with the agency and, if appropriate, the end-hirer.

Interestingly, umbrella companies that have SDC questionnaires are few and far between. Since the introduction of the legislation, almost every umbrella employee is subject to SDC and has failed the associated questionnaires.

Therefore, many of the UK’s leading umbrella companies completely disallow employee expense claims and don’t allow them to claim tax relief on travel and subsistence expenses.

In reality, almost every umbrella company employee is subject to supervision, direction, or control at their place of work, and umbrella companies have decided it’s not worth offering questionnaires.

Not only does this save the umbrella time by reducing administrative burden, but it also prevents any confrontation from employees who are certain they’re not subject to SDC when they are.

Should HMRC investigate an SDC case, it will look at the available evidence, including the terms of engagement.

They will also review the working practices to ensure that the job was fairly and accurately reflected in the contract wording. Any discrepancies could result in the worker being penalised and the umbrella being reprimanded as well.

Can umbrella employees who are subject to SDC claim any expenses?

Where SDC applies, the scope for claiming expenses is limited. In most cases, only standard employment-type expenses may be available:

• Travel – Mobile workers who travel from site to site in the course of their role may be eligible for tax relief on travel. However, normal commuting is excluded. Travel costs include public transportation (bus, train, etc.) and mileage.
• Overnight stays—If an umbrella employee is required to travel for work and stay overnight, the cost of accommodation and some meals may be reimbursed.
• Clothing and equipment – Any costs associated with clothing and equipment required for work may be reimbursed.
• Working from home allowance – A work-from-home allowance is available to those who conduct most of their work-related activities from home. You can check eligibility on the government’s website.

To claim the expenses above, workers must have an agreement with their agency. The expenses will be added to the worker’s salary, just like permanent employees.

These are called chargeable expenses; compliant umbrella companies should not process these directly.

Umbrella employees can still claim additional tax relief for expenses incurred directly related to carrying out tasks associated with the assignment.

To claim these, a worker must submit a self-assessment tax return to HMRC for each eligible tax year.

If workers are not subject to SDC, what tax relief could they benefit from?

Workers not subject to SDC can still claim tax relief for travel and subsistence expenses, as they are considered mobile workers.

These workers can also claim the additional expenses listed above (those to which workers subject to SDC may be eligible).

An umbrella company promoting expense claims should be treated with caution

The 2016 SDC legislation effectively stopped umbrella employees from accessing tax relief on travel and subsistence expenses.

However, this hasn’t stopped some unethical payroll providers from promoting the fact they’ll process expense claims efficiently and with little objection.

Any umbrella company that does this should be treated with great caution, as they are almost certainly behaving unethically.

Anyone who uses a non-compliant umbrella company (possibly a tax avoidance scheme or disguised remuneration arrangement) could be in serious trouble with HMRC in the future and face life-changing penalties. It’s not worth the risk.