If you work via an umbrella company, you may incur various business expenses while carrying out 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.
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 many of those using umbrellas could no longer take advantage of the tax relief.
Supervision
An umbrella employee is considered under supervision if they have to report to a senior staff member and are not an authoritative member of the workforce. 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 about completing their work. If a manager on the site has the authority to tell the worker how to do specific aspects of their job – direction applies.
Control
An umbrella employee is subject 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.
SDC will always apply to some jobs
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 on lower wages automatically illegible for claiming expenses because they assume 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 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 possibly 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 associated questionnaires handed to them.
Therefore, many of the UK’s leading umbrellas completely disallow expense claims by employees and don’t allow them to claim tax relief on travel and subsistence expenses.
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 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?
Umbrella employees subjected to SDC may still be eligible to claim expenses, but only those 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—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 exists 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 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 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 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 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.
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