If you are working via an umbrella company, you may incur a variety of business expenses during the course of your work. 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.
As a result of new strict rules which came into effect in April 2016, the scope to claim expenses has become very limited for umbrella company clients.
Supervision, Direction and Control (SDC), and its impact on the industry
In 2016, Supervision, Direction and Control (SDC) – legislation designed to stop umbrella company employees from benefitting from tax relief on a majority of expenses, including travel and subsistence – went live.
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 a large percentage of those using umbrellas could no longer take advantage of the tax relief.
An umbrella employee is considered under supervision if they have to report to a senior member of staff and are not an authoritative member of the workforce. Supervision can also mean that a senior team member can hand down disciplinary action – if it’s necessary.
Direction means that the umbrella employee is given instructions about completing their work. If there is a manager on the site who has the authority to tell the worker how to do specific aspects of their job – direction applies.
An umbrella employee is subjected to control if they can be moved around by someone at their place of work or told to stop doing what they’re working on and start something else. Control also applies if an umbrella employee is asked to go to a different site to work – regardless of how long they are required to do it for.
SDC will always apply to some jobs
The SDC rules will always apply to some jobs because there will be a senior member of the team with instructions that involve supervising, directing, or controlling other members of staff.
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 on lower wages to automatically be illegible for claiming expenses because it’s assumed these workers are under SDC.
How do umbrella companies approach SDC?
Umbrella companies usually handle SDC in two ways – they have a strict SDC questionnaire in place, or they will deny any employee from claiming tax relief on expenses.
As the name suggests, an SDC questionnaire is a series of questions that a worker must answer about their assignment, and it’s imperative 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 extremely unlikely 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 possibly end-hirer.
Interestingly, umbrella companies that have SDC questionnaires are few and far between. Since the introduction of the legislation, almost every umbrella employee has been found to be subject to SDC and has failed associated questionnaires handed to them.
Therefore, many of the UK’s leading umbrellas don’t allow any of their employees to claim tax relief on travel and subsistence expenses – by completely disallowing expense claims.
In reality, almost every umbrella company employee is subjected to supervision, direction or control in their place of work and umbrellas have decided it’s not worth offering questionnaires.
Not only does this save the umbrella time by reducing administration, but it also stops any confrontation from employees who are certain they’re not subject to SDC when they are.
Should HMRC investigate an SDC case, they will look at the evidence available, including the terms of engagement. They will also review the working practices to ensure that the job was fairly and accurately reflected in the wording of the contract. 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?
Umbrella employees subjected to SDC may still be eligible to claim expenses, but only ones that workers in permanent employment have access to as well. These include:
- Travel – Mobile workers who travel from site to site in relation to their role could be eligible for tax relief on travel. However, normal commuting is excluded. Travel costs include public transportation (bus, train, etc.) and mileage.
- Overnight stays – Should an umbrella employee be 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 – There is a work from home allowance for 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 in place with their agency, and the expenses will be added to the worker’s salary – just like permanent employees. These are called chargeable expenses, and compliant umbrella companies should not process these directly.
Umbrella employees can still claim additional tax relief for expenses that have been occurred as a direct result of carrying out tasks associated with the assignment.
A worker needs to submit a self-assessment tax return to HMRC for each eligible tax year to claim these.
If a worker is not subject to SDC, what tax relief could they benefit from?
Workers not subject to SDC can still claim tax relief on travel and subsistence expenses because they are considered mobile workers. These workers can also claim the additional expenses listed above (the ones that workers subject to SDC could potentially be eligible for).
An umbrella company promoting expenses is almost certainly worth avoiding at all costs
The 2016 SDC legislation effectively stopped umbrella employees from having access to 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 avoided at all costs because 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.