The potted guide to umbrella company expenses
The truth is, no matter what you may have been told, the golden rule when it comes to claiming expenses is that you can only offset those expenses that have been incurred wholly, exclusively and necessarily in the performance of your duties.
Having the ability to offset expenses against your tax bill is a major incentive to join an umbrella company. It is however YOUR responsibility to ensure you only claim for items that are allowable for tax purposes. If HMRC choose to audit your expenses, they may wish to recoup any tax saved if it can be proved that you have claimed fictitious or non-allowable items.
Definition of a temporary workplace
You are entitled to claim the travel and subsistence expenses listed below only when performing your duties at a ‘temporary workplace’. A temporary workplace is defined as a place of work you attend to perform a task of limited duration or for some other temporary purpose.
As an umbrella company contractor, you will undertake consecutive short term assignments onsite at the client’s main place of work. Travel and subsistence expenses cannot be claimed if you have worked, or when you know you will work more than 2 years at one particular location. If your contract dates are extended to a period greater than two years your expense account should be frozen to comply with HMRC regulations. In this event, the definition of your workplace for tax purposes changes from ‘temporary’ to ‘permanent’.
Summary of tax allowable expenses
We have compiled a list of expenses that you are entitled to claim whilst an employee of an umbrella company, attending a temporary workplace.
Travelling to and from the office by car is allowable provided it meets the definition of a temporary workplace. You can claim 45p per mile (up to 10,000 miles) and 25p per mile above 10,000 miles in any given tax year. The mileage allowance covers petrol, car servicing, insurance, car tax and all other running costs associated with the vehicle. If you have a motorbike, you can claim 24p for each ‘business’ mile and 20p per mile if you choose to cycle to work.
As a passenger travelling to the office in a car, you are entitled to claim 5p per mile. London congestion charges and car parking are also allowable expenses, as is most public transport.
Secondary accommodation costs
You can claim for accommodation if you are staying away from your normal permanent address and at a temporary workplace in the course of your assignment (business travel or attending work-related training). The umbrella company will generally require a receipt that includes the Hotel / B&B’s name, address and telephone number (preferably this should be a VAT registered business with the receipt supplied on headed paper).
Personal Incidental Expenses (PIEs)
For incidental overnight expenses (e.g. the cost of a morning newspaper or telephone calls home) you can claim up to £5 per night if you are working in the UK and up to £10 per night outside the UK.
If you are required to wear protective clothing as part of your job, you may be able to claim the cost as an expense. If however such clothing could be reasonably worn outside the workplace, it will almost certainly be disallowable, as is dry-cleaning and other related expenses (such as alterations).
Unless you can justify that training expenses are exclusively linked to your existing contract, it is unlikely that these can be claimed.
The cost of an eye test is claimable as an expense on the basis that you are required to use a PC as part of your everyday job. Glasses and contact lenses are also allowable on this basis.
Subscriptions to professional and trade associations are allowable as a business expense where the membership to such bodies is relevant to the duties of the employment and where HMRC recognise such subscriptions as being income tax deductible (more information is available from HMRC).
In a similar way to training expenses, you may be able to claim the cost of equipment if you can prove that it is a necessary expense of your current assignment.
Investing in a pension is highly tax efficient. Pension payments are deducted pre-tax by your umbrella company which means that you can save as much as 54% in tax relief. More information about contractor-specific pensions can be found on our pensions page.
Billable and non billable expenses
A billable expense is a reimbursement for a cost incurred by you and paid to your umbrella company by the agency or end client as an addition to your normal labour invoice. The nature of the expense will determine whether it can be paid back to you before tax from your umbrella company.
A non billable expense is an expense incurred by you but not charged to the agency or end client as an addition to your normal labour invoice. As with billable expenses, the nature of the expense will determine whether it can be paid back before tax from your umbrella company.
The majority of expenses you incur whilst working for an umbrella company will be non billable.
A word about dispensations
We have said it before and we will say it again, there really is nothing special about a dispensation. They are granted to umbrella companies as a way of reducing administration at tax year end. They do NOT allow a worker to claim excessive amounts of non-receipted expenses and any company claiming so should be avoided at all costs.
Still confused? It can be a minefield we know! If you are still trying to get your head around what an umbrella company is and how you gain a tax advantage by claiming expenses, please feel free to add your details below and one of our trusted umbrella companies will explain everything you need to know.
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