Contractors’ Questions: Can I expense travel costs via an umbrella company, when visiting a client now and again?

Contractor’s Question: I'm a former limited company contractor ignorant on expenses in the umbrella company world.

Anyway, every now and again I travel to London to see my client -- they don't/won't pay for my journey, and I basically do it as a gesture of goodwill and take the financial hit.

But I noticed on FreeAgent’s Self-Assessment software that it asks me about expenses incurred including travel. It’s Box 17. What's the deal here; can I include my travel expenses? And if so what's the catch, it feels a bit too good to be true?

Expert’s Answer:  There are three sets of HMRC rules that need to be considered when expenses are paid to a worker operating through an umbrella company.

Rule 1 -- Temporary Workplace

The first rule concerns whether or not travel is to a “temporary workplace.” 

Only costs of travel to a temporary workplace can be paid free of tax and national insurance.

Some years ago, the rules for umbrella companies were aligned with those for agencies. Each assignment is deemed to be a separate employment. Regular travel to a workplace for the duration of the deemed employment can be a permanent workplace but, in your question, we are told that you are making just visits.

Regular attendance at another location can become a permanent workplace but, if the attendance there is for limited duration or a temporary purpose, then it would not become a permanent workplace.

N.B. HMRC considers attendance for less than 40% of the working time to be limited duration.   

In your question, the travel to London to see the client is “every now and again.” That location is therefore not a permanent workplace, so the first rule is met.

Rule 2 -- Salary Sacrifice

The second rule is known as the ‘salary-sacrifice’ rule. 

Umbrella companies may be able to allocate part of the amount received for the work which the contractor has done, to expenses. 

However, the ‘salary sacrifice’ rule, applicable to umbrella companies, says that if the level of wages paid is dependent on the expenses, then the expenses are not allowable (and must be treated as wages).

In your query, you make clear that the client does not make an additional payment. So, if the umbrella company was to use part of the money received to pay the expenses of travel to London, the amount available for wages would reduce (and the amount of tax and national insurance would reduce). As that would mean that the wages were dependent on the level of expenses, the salary sacrifice rules kick in, and the expenses would have to be treated as wages anyway.

Keep in mind, the situation would be different if the client was paying an additional amount for the those travel expenses. Provided that the extra amount falls within the normal rules for reimbursement tax and NI free e.g. mileage rates or reimbursement of the actual costs of the train travel, then the level of wages is not dependent on the level of expenses. No salary has been sacrificed in order to pay the expenses.

Returning to the issue of expenses, the umbrella company is unable to pay the expenses, even though they are to a temporary workplace, because of the ‘salary-sacrifice’ rules.

Rule 3 -- ‘in the job’ expenses via self-assessment tax return

Last but not least, we have the third rule which you've already identified as permitting tax relief -- by making a claim to HMRC via your self-assessment tax return.

The claim is for the expenses incurred ‘in the job’ and not reimbursed by the employer, i.e. the umbrella company.

The claim only gives relief for tax -- meaning no relief is given for national insurance. So a claim for, say, £100, would result in a reduction in the self-assessment tax bill, of £20 for a basic rate taxpayer and £40 for a higher rate taxpayer.

The reason this relief is given is that it is also available to someone, in similar circumstances, who is an employee of the end-client.

And finally, don’t forget HMRC’s ‘five-job rule’ if it might apply to you…

For ContractorUK readers that this applies to, but who do not complete a self-assessment tax return, the advice is different. In fact, for claims of less than £2,500 p/a. a claim can be made online and can be made for the current and the last four tax years. Claims in excess of £2,500 require you to register for self-assessment and then claim on the return. If you are claiming for more than five jobs (different employers or different umbrella companies) then the claim has to be made by post. That’s presumably because HMRC’s online system only has five fields available for this! They don’t say whether you could make more than one online claim.

TL;DR: Can I expense travel costs via an umbrella, when visiting a client now and again?

So to answer the question, yes in a nutshell you can claim via your self assessment tax return, the tax relief on the expenses of travelling to see your client in London. A little acknowledgement, if you will, of that goodwill you're showing!

The expert was Graham Jenner, founder of chartered accountancy firm Jenner & Co.