Contractors, count your umbrella expenses on one hand

Any contractor who had hoped all the talk about expenses would die down once the T&S legislation passed at the start of this month will be feeling disappointed, writes Lucy Smith, managing director of Contractor Umbrella.

In fact, it’s just three weeks since the legislation on Travel and Subsistence (T&S) expenses came into effect on April 6^th, but the clamour, confusion and uncertainty is more acute than ever.

And it’s not for lack of the contractor sector trying. Advisers have spoken up about the importance of having agents and clients on-board for expenses; what the HMRC guidance on the T&S legislation really means and which expenses appear to be out of scope. As if all that wasn’t enough, today ContractorUK reports that compliance experts are urging recruiters not to re-classify their temporary workers as ‘unsupervised’ in a clumsy bid to secure them their expenses. Unfortunately for umbrella contractors, it's actually now a case of:

Expenses? What expenses?

Prior to April 6th 2016, umbrella companies could process expenses that had been incurred by a contractor while on assignment at a temporary workplace, providing there was an intention on the part of the contractor to have more than one assignment while under the umbrella company’s employment. Any allowable expenses would be processed for tax relief purposes via salary sacrifice and the contractor would receive the relief at the point the payments were processed.

But since April 6th 2016, HMRC now assumes that if you provide your services through an employment intermediary (such as an umbrella company) then you are subject to Supervision, Direction or Control, (SDC), or the right of SDC, and each engagement will be treated as a separate employment and each workplace will be regarded as a ‘permanent’ workplace. 

So in its simplest terms; any expenses that are ‘non-chargeable’ i.e. not covered by the client in full, will not be allowable from the 6^th of this month onwards via ANY complaint umbrella company. If a contractor incurred the expenses pre-April 6th 2016, then they may still be able to claim these back via self-assessment but they cannot be processed or backdated by the umbrella. If the contractor has incurred non-chargeable expenses which they consider attract tax relief then they would have to claim the relief by sending a form P87, or a Self-Assessment Tax Return to HMRC after the end of the financial year.

What does this mean for contractors looking to claim expenses post-April 6th 2016? Well, travel between your home and the workplace is now regarded as ordinary commuting and therefore travel costs do not attract tax relief, as would be the case with an ‘employee’ of the company. If a contractor considers that they are not subject to SDC, or the right of, then they could look to appeal against HMRC’s assumption.

What's included in T&S

The above should set straight how the changes affect travel and subsistence, but what else does the definition of ‘T&S’ cover?  Well ‘Travel’ is exactly what it says and shouldn’t need further explanation. However the confusion seems to come in with the fact that ‘subsistence’ should be treated as meaning “any other expenses” and not just food. It covers things like secondary accommodation and incidental overnight costs, all of which have been incurred as a consequence of the travel.

A closer look at the HMRC Employment Income Manual that covers the rules for travel and subsistence reveals that the overall effect of the change for employment intermediaries is to treat all contractors as if they were directly engaged by their client, so the same rules now apply to both.

In terms of accommodation, it is not relievable when attending a permanent workplace, so where this is the case income tax and NICs would need to be made on any payments.

So what happens to chargeable expenses? In theory these can still be processed exactly as they have been up until now as long as they are the “actual” receipted cost. If the agency/client pays more than the receipted cost of an allowable expense or pays an expense that does not attract tax relief, then the umbrella would have to subject the total amount paid to tax and national insurance contributions and the contractor would have to claim the relief by sending a form P87/ SA tax return to HMRC after the end of the financial year.

If therefore you are working via an umbrella, what won’t the legislation affect? In a nutshell; it is just pensions, childcare vouchers and charitable donations, all of which can still be processed via salary sacrifice through the umbrella.

Final T&S takeaway

There are now companies in the contractor sector springing up to offer new ways of processing ‘expenses’ for contractors. We have seen ways of creating an expense pot whereby money is estimated for expenses, put aside and drawn when the expense is incurred, not via salary sacrifice. So this would have to be the actual receipted cost and what would happen if there was money left over? Who would end up with this? Technically could it not be classed as an unlawful deduction of earnings? Are scale rates still valid? Can I then self-certify for SDC? There are many unanswered questions; so much uncertainty and so few answers from HMRC (at the time of writing). But if you just want to stay safe and sound as an umbrella contractor, as many are suggesting to us, then it’s simple: stick with the tried and tested straightforward PAYE umbrella model. At least this model provides certainty and lets you know where you stand, definitively.