Yup – you guessed it – another umbrella company focused blog. And this time, we’re looking at umbrella company expenses. As more and more contractors find themselves inside IR35, demand for umbrella companies has risen like never before. Therefore, there are many contractors, freelancers and agency workers looking for information regarding umbrella company expenses. We’ll summarise the situation for you. Unfortunately, it may not make for great reading.
Supervision, direction and control (SDC)
Discussing umbrella company expenses is pretty dry stuff, so we’ll try and be as “to the point” as possible. To put it simply, the government decided that too many umbrella employees were benefitting from tax relief on travel and subsistence expenses that permanent employees couldn’t. And seeing as the umbrella workers were working in the same manner – this was deemed unfair (which makes sense). This led to the legislation commonly referred to as supervision, direction and control (SDC) to be rolled out in 2016.
From April 2016, umbrella companies were only entitled to claim tax relief on travel and subsistence expenses if they could prove they were not subjected to supervision, direction or control when conducting their assignment.
Supervision is having someone overlook the work you carry out to ensure it’s being done appropriately. Direction is more along the lines of being told what you need to do and being required to follow instructions from a senior staff member. Control is effectively when an umbrella employee is subjected to good old-fashioned micro-management. This could include being told to stop what you’re doing and move to another part of the company to complete varying tasks.
Who is subjected to SDC?
You’ve probably already guessed the answer to this – almost every umbrella company employee is subjected to SDC. When the legislation first rolled out, most leading umbrella companies had SDC questionnaires in place that allowed a contractor to answer a series of questions about their assignments.
Over the years, almost every umbrella has stopped running SDC questionnaires because they were a waste of time. Nearly every contractor failed. And annoyingly for umbrella companies – some contractors deliberately lied as a way of trying to bypass the legislation. If an umbrella unlawfully processes expenses, the government will punish them.
Expenses – one of the major disadvantages of using an umbrella company
It’s true – the lack of being able to claim expenses is one of the major umbrella company disadvantages by contractors, freelancers and agency workers throughout the UK. Contractors working through a personal service company can take advantage of claiming relevant, business-related expenses, and so too can sole traders.
Reimbursed expenses
Umbrella employees can still claim reimbursed expenses – just like full-time employees can. For example, if you are required to travel for work and purchase a ticket, you can expect to be refunded in full by your agency (or end-client). However, should you be entitled to tax relief – umbrella companies will handle this differently. Some can do it with each payment frequency. Others will require you to claim the tax relief you’re entitled to by submitting a self-assessment tax return at the end of the relevant tax year. This isn’t ideal – we understand. However, most umbrella workers will not be eligible to claim reimbursed expense, but if you are – speak to an umbrella before registering – to see how they process them.
Don’t let naughty umbrella companies trick you
Be warned – some umbrella companies are sneakily adding an “expenses allowance” to take home pay calculations they’re giving to contractors. This is naughty because, as we’ve explained – a majority of umbrella company employees will not be able to claim expenses. Therefore, any umbrella company that includes them as standard in their pay calculations should be avoided, because as far as we can see, this is done to deceive deliberately.
On the other hand, if you come across an umbrella company that allows you to claim expenses easily and without much opposition – you should be equally weary! This sounds like the actions of an irresponsible umbrella company that’s buttering up its employees before something catastrophic strikes down the line.
The general rule of thumb is this – use an umbrella company and you almost certainly won’t be eligible to claim tax relief on any umbrella company expenses (travel and subsistence). Of course, exceptions apply, but we don’t want to mislead anyone.
