An umbrella company UK has become one of the most popular methods by which contractors and freelancers in UK manage their earnings. The advantage of umbrella companies is that they offer the same benefit as being an employee, in that tax and National Insurance contributions are done on their behalves, but allow the individual to work on short-term contracts.
However, the question that gets posed the most often by contractors is: What can I claim as an expense using an umbrella company UK and what cannot I claim?
This question is confusing particularly as the rules at HMRC have changed over the past years. It is important to know what you can and cannot claim in terms of costs to ensure that you are compliant but get the maximum take-home pay.
How the Umbrella Company Expenses Work?
By working via an umbrella company UK, you are actually working with them as an employee. They send an invoice to the client or the agency on your behalf, receive the bill, pay the tax and National Insurance then give you a salary. Due to this type of employment, the expense claims are not the same as operating as a limited company director.
In general, any expenses may only be claimed as being incurred wholly, exclusively and necessarily in the course of work. Nevertheless, with the new changes that HMRC has made especially regarding supervision, direction and control (SDC), a number of contractors are no longer eligible to claim travel and subsistence allowances by working under an umbrella.
When under SDC, HMRC considers you to be in a regular employment relationship, and as such, you are not able to claim the same wide variety of expenses you used to be able to.
1. Expenses You Can Claim
Even with an umbrella firm, you can only claim so much in expenses without proper paperwork and a restriction on what you can claim.
One of the most typical expenses that is still permissible is business-related mileage incurred in one’s own vehicle. You can typically claim mileage at the rates permitted by HMRC if you use your personal vehicle for business travel (but not for commuting to your usual office). Similarly, if your professional subscriptions and memberships are explicitly linked to your employment and are on the approved list maintained by HMRC, you may be able to claim them.
The price of any software, hardware, or training classes you need to do your job properly is also a legitimate expense. It might be acceptable, for example, if you’re an IT contractor and your job requires a certain license for software. You may be able to get your money back from some umbrella firms for tools and safety gear that you need for your jobs.
2. Expenses You Cannot Claim
“Travel and subsistence” is the largest group of non-reimbursable costs. Before HMRC tightened up, contractors could frequently claim for things like meals, lodging, and transportation to and from client sites. Under an umbrella arrangement, these types of charges are no longer allowed unless you can prove that you are not under supervision, direction, or control.
It is not possible to claim expenses for regular commuting, such as gas or train tickets to and from your primary location of employment. Also not allowed because they are considered personal living expenses by HMRC, even if bought while on the clock.
Moreover, for the majority of workers under an umbrella company UK, home office expenditures are not an option. Umbrella employees, whose duties are similar to those of a regular employee, are not usually entitled to the same reimbursements as limited company directors, who are occasionally able to divide up personal expenses for corporate purposes.
Claiming entertainment expenditures is another area where contractors may get caught. While it may be common practice for umbrella employees working under an umbrella company UK to treat clients to lunch or buy presents for business relations, these activities are not allowed as deductible expenses according to HMRC.
Using Tools to Determine Your Eligibility
Since the rules aren’t always clear, contractors often find it helpful to use tools that can quickly make their position clear. You can find HMRC’s checklists and guidelines for allowed costs, for instance, on their website.
Expense calculators and eligibility checkers are also provided by some umbrella firms. Use this free tool offered by different contractor support platforms to determine your SDC status if you are uncertain about your level of supervision, direction, or control. You can determine if travel and subsistence claims are still available to you by knowing your position.
Compliance and Its Significance
Tax fines or even investigations by HMRC might occur from incorrectly recording costs. This is why most umbrella providers have stringent policies about permitted activities. Reimbursable expenses are defined by a respectable umbrella provider, and proof of purchase or other documentation is typically required for each claim.
Spending is not an attempt to artificially inflate your income; rather, it is a tool to recoup lawful costs related to your job. You and your umbrella business are both put at danger if you try to claim personal expenses or push the limits.
