If you are a director of your own limited company, you will probably be used to claiming tax relief on a variety of business-related expenses. While this used to be the case for umbrella company employees, the rules have recently tightened around umbrella company expenses, and the tax relief you can claim has been drastically reduced.
Understanding umbrella company expenses
Before the legislation changed in 2016, contractors working through an umbrella company were able to reduce their tax bill by claiming a wide variety of expenses. The most popular of these were travel and subsistence; however, contractors also claimed tax relief on the following:
- Mobile phone
- Clothing or equipment
From April 2016, HMRC introduced changes to the sector which massively reduced umbrella company expenses. The changes were brought into effect as the government believed many contractors working through umbrella companies were operating similarly to permanent employees – who were not able to claim tax relief on travel and subsistence expenses.
When it comes to determining the status of an umbrella employee, the government uses Supervision, Direction and Control (SDC) to identify who is genuinely self-employed and who are (for all intents and purposes) employed. Ultimately, the legislation brings the tax treatment of umbrella workers operating similarly to permanent employees in line with their permanent counterparts.
What is Supervision, Direction and Control?
The purpose of SDC is to determine whether you can choose how you complete your assignment or whether your end client is responsible for deciding how the work is carried out. The definitions for SDC are as follows:
Supervision means the extent to which your client is overseeing the work you carry out as part of the assignment and whether you are performing it to the required standard.
Direction refers to when a person is providing you with instructions, specifications or guidance as to how the work must be completed.
Control is when you are told how to complete the work. Control also refers to someone having the ability to move you from one task to another.
What umbrella company expenses can I claim?
If you are subject to SDC, you may still be able to claim umbrella company expenses, but these must be approved and reimbursed by your end client or recruitment agency. Reimbursed expenses are tax-free allowable business expenses which are comparable to expenses permanent employees can claim if they are required to travel to different locations for work.
If you are not subject to SDC, you can continue to claim expenses that are incurred wholly and exclusively for business purposes.
Always use a compliant umbrella company for your payroll
We cannot stress this enough – only use a compliant umbrella company for your payroll. If you come across a provider actively promoting umbrella company expenses – be extremely cautious, and we highly recommend avoiding them! It is highly likely you are subject to SDC if you are working through an umbrella company and you will not be able to claim expenses – it isn’t worth the risk!
If you are looking for a compliant, FCSA accredited umbrella company – then look no further than our top 10 umbrella companies. We have made sure only to include umbrella company’s that have passed FCSA’s rigorous audit to ensure you are in the safest hands!