Umbrella companies are popular for the freedom and benefits they provide to workers who have just started working on their own or do not wish to operate through a limited company. With the help of an Umbrella, workers can take up multiple assignments and as they are employed by the Umbrella, they can receive all the benefits an employee is entitled to.
As an employer, the umbrella can also reimburse the expenses incurred by the worker as part of their assignment. Claiming and reimbursing of legitimate expenses depends upon the SDC (supervision, direction and control) status and the type of assignment contractor has chosen to work on. Umbrella companies and workers need to adhere to the strict guidelines and legislations imposed by HMRC to ensure the claim for the expenses is lawful, or else they could be subject to income tax and national insurance.
The below article discusses some of the key aspects that need to be considered for an expense to be valid.
As per the changes made on 6th April 2016, contractors can no longer claim tax relief on travel and subsistence expenses if they are subject to SDC (Supervision, Division, and Control) from their end client. Before 2016, expenses were a popular mechanism for umbrella companies to give the worker a higher take home by processing travel and subsistence expense tax-free.
HMRC has put a blanket ban on such claims, therefore no compliant umbrella can process tax-free expenses post April-16 without assessing the worker’s SDC status. A contractor whose duties and responsibilities are similar to that of a permanent employee is said to come under SDC. The tax processing is also made similar by removing travel and meal expenses from the tax-free list. No matter what they say, no compliant UK umbrella company can process non-chargeable expenses for tax relief anymore.
In simple terms, a full-time employee cannot claim tax relief for the daily meals and to & fro expenses from work to home. Similarly, a worker under SDC is also no longer eligible for such claims.
Broadly speaking person is subject to SDC, if they –
This means that the worker doesn’t work or make decisions on their own, instead they follow the instructions of the supervisor, same as an employee does.
Supervision is when the employer/ authority has the right to check how the work is done and if the required standards and specifications are being met.
Direction is the way in which the authority orders/ guides/ instructs the person to start, continue, and finish the job.
Control refers to both controlling how the job is done and also having the control to move the person from one job to another.
The definitions and rules of SDC test are complicated. The best way to check if the SDC test is met is to study the contract between the employee and the agency and obtain the detailed job description and specification. Facts can also be gathered from other employees, clients, intermediaries, or any other involved parties.
Salary sacrifice is simply the benefits or expenses the Umbrella Company/employer provides in return when an employee/worker gives up a portion of their salary/earnings. This means the expenses and benefits were reimbursed without Tax and NI implications, increasing the net take home for the employee. To remove the tax advantage employees receive by giving up the right to income in return of a benefit, HMRC introduced the Operational Remuneration Arrangement (OpRa).
Operational Remuneration Arrangements (OpRa) came into effect on 6th April 2017. The rules apply in two conditions -
If an expense is caught under OpRa, then it cannot be reimbursed tax and NIC free to an employee.
There are some exclusions and special case benefits that do not come under OpRa. Some examples of excluded benefits are mileage, registered pension schemes, cycles, childcare vouchers, cars (with CO2 emission less than 75grams). Special case benefits are the ones similar to subsidised meals at workplace which have a separate legislation and cannot be used in conjunction with OpRa.
Since an umbrella company can no longer reimburse expenses through salary sacrifice, it will usually run a Fixed Expense Pot model for its employees.In simple words, Fixed Expenses Pot is a pre-agreed amount an employer sets aside per hour/day based on whether the employee has any regular expenses. The umbrella company adds the amount to contractor’s expense pot every week/ month and can reimburse when the employee submits a valid claim and receipt for the expense.
While the model is quite complex, we have highlighted few points for easy understanding.
Maintaining receipts are crucial for employees. Every single bill/receipt should be collected and filed as it can be checked any time by HMRC. It is advisable to save multiple copies of the receipts. In case of an enquiry, HRMC can check the records for up to six years back.Hence, it is recommended that you must save the receipts/copies not only for the year for which it is claimed but for the last 6 years too. If workers failed to provide the proof of their claim, they are liable to pay the tax expenses.
In general, the workers will have to upload the claims once every week or month as per the terms of the contract with the umbrella company.
A worker can claim tax relief on the expenses they have incurred as part of their assignment and not reimbursed by their Umbrella Company by applying to HMRC.
Form P87 can be used to claim tax relief/ tax refund by employees who are a part of temporary contracts. Employees can claim only up to £2,500 through form P87.
If the expenses are more than £2,500, the workers can file self-assessments to claim tax-relief on the expenses. The Self-Assessment forms include a page for employees to claim tax relief for the expenses the employer did not reimburse.
The employee working for an umbrella company can use either method to claim tax relief. The expense claim can be filed with HMRC after the end of the tax yearin which they are incurred but not later than 4 years from the end of the tax year.
There are many umbrella companies in the UK, but contractors should always choose to work with an APSCo, FCSA, or Professional Passport accredited umbrella companies. Umbrella companies will be able handle the contractor’s payments, provide them insurance and ensure the expenses are claimed legitimately.