As a regular employee, you can only claim for expenses pre-agreed with your employer. So, if you’re working away, for instance, they may agree to cover your travel costs and evening meal. However, working as a contractor, you can claim for various tax-deductable expenses.
The question is: where do umbrella companies sit? In this guide, we’ll take a closer look at umbrella company expenses, how they work and what you can claim.
How expenses work
As touched upon, expenses can be broken down into two broad types:
- Employee expenses, which are reimbursed by your employer
- Employer expenses, for which VAT can be claimed back
Most importantly for self-employed contractors, they are classed as an employer for VAT purposes. That means they can claim back VAT on a number of expenses:
- Accommodation – Reasonable costs for overnight stays, along with breakfast and evening meals within those stays, can be offset against your income.
- Equipment – Anything that’s essential to the work you’re carrying out can be offset. Again, this is within reason, so normal work clothes like shirts aren’t included, but protective clothing is.
- Training – Need to complete specific training for a particular contract? The costs can be offset against your income.
- Public transport – Be sure to keep tickets for planes, trains or buses. The cost of public transport is included as an offsettable expense.
- Independent travel – Believe it or not, self-employed contractors can also offset the cost of their own travel by car, motorbike or bicycle. The cost is calculated as 24p per mile on motorbike, 20p per mile on bicycle and 45p per mile in a car (25p per mile after 10,000 miles per year).
Rather than actually claiming back these expenses, they are offset. That means they’re essentially deducted from your taxable income, so in effect you don’t pay tax on them. Let’s say you earned £4,000 in a month but spent £1,000 on expenses. You would only pay tax on the £4,000. The tax-free £1,000 would effectively reimburse you for the tax you paid on your expenses.
Umbrella expenses – how it was
Prior to 2016, contractors working through umbrella companies could claim all of the expenses above. Umbrella companies would process VAT returns on your behalf, giving you your take-home pay with offsettable expenses taken care of.
That all changed in April 2016, when the UK Government introduced Finance Bill 2016.
Umbrella expenses since April 2016
Finance Bill 2016 was originally released in December 2015 and came into force in April 2016. It included a section titled ‘Income Tax: employment intermediaries and relief for travel and subsistence’, which affects all workers employed through an intermediary. That includes personal service companies, recruitment agencies and umbrella companies.
Specifically, the Finance Bill restricts access to tax relief for home to work travel and subsistence for anyone working through an umbrella company or other intermediary. That meant that umbrella company employees were no longer eligible for tax relief on accommodation, equipment, training and transport.
Essentially, they would be classed more like regular employees than contractors. Employees aren’t given expenses for their regular commute to and from work, for instance.
So, what expenses can you claim through an umbrella company?
Going back to the two main types of expenses, you can still claim employee expenses through an umbrella company. These are the pre-agreed expenses which are reimbursed by employers – or your clients as a contractor working through an umbrella. The expenses for which companies will reimburse you are similar to those listed earlier:
- Equipment – This could be tools, parts or software that is required to complete a specific job.
- Travel – If you need to travel a substantial distance to get to a job, they will typically offer to reimburse your travel. Otherwise, it may simply not be cost effective to take on the contract.
- Accommodation – Similarly, if you need to stay anywhere overnight, it’s not usually practical for you to pay for a hotel and meals yourself out of your own pocket.
Of course, it’s down to specific company policies whether a company will reimburse you for any of these expenses. Be sure to check your contract with that client to see which expenses, if any, are pre-agreed.
Why do companies pay expenses? In short, it’s more cost-effective. Employers can claim back their own VAT on these expenses, so it’s cheaper for them to reimburse you than simply pay you more and leave you to fend for yourself.
Will my umbrella company take care of expenses?
As an intermediary, umbrella companies will take care of processing invoices, including reimbursable expenses. Typically, umbrella companies will require you to complete a timesheet, including any reimbursable expenses. They will then invoice your client or recruitment agency for the hours you have worked in that week or month along with the expenses they need to reimburse.
Once the umbrella company has been paid by your client or recruitment agency, they will deduct tax and National Insurance contributions through pay-as-you-earn. Finally, you’ll receive your take home pay and payslip, including a full break down of your deductions and expenses.
