Contractors’ Questions: Is my umbrella company fobbing me off on expenses?

Contractor’s Question: I've recently been on a business trip on behalf of my client. The client has fully reimbursed the expenses – the hotel, travel and meals which got paid by my agency to my umbrella company in March 2024.

My umbrella company then treated the expenses as income and deducted Employer and Employee National Insurance along with income tax from the expenses. This was while they worked out if the expenses were allowed – they clearly were in my view.

The umbrella has now come back to me and said the expenses are allowed, but as this decision was made in the new tax year they can't refund any of the deductions. Instead, the umbrella says, I have to go through the P87 form route to get back the tax.

But there is no means to get back the National Insurance Contributions that have been made. The expenses were for about £1,000, so you can imagine how much the deductions were! Is what the umbrella company doing correct or is it in the ‘too difficult pile’ and they are just trying to fob me off?

Expert’s Answer: Almost needless to say, umbrella company expenses is a complicated area!

Since the changes to the expenses rules for umbrella companies in 2016 there has been a lot of confusion over the payment of expenses such as this.

It’s a permanent workplace – just not in contractors’ eyes…

The general rule is that the cost of travel expenses to a workplace are not allowed, on the basis that travel is to a permanent workplace. 

While a contractor may consider the workplace for each assignment as being a temporary workplace, the rules for umbrella companies (and agencies), deem each assignment to be a new employment for the purposes of travel expenses. 

Be aware, the standard rules say that a workplace that is attended for the majority of the employment is a permanent workplace.

Keeping it simple

To avoid the complications of determining whether or not any travel costs relate to a permanent workplace, many umbrella companies just don’t allow contractors to claim for travel expenses.

Travel to a temporary workplace is ‘allowable’

In your circumstances, the travel is in the course of the employment and so HMRC would accept that this is to a temporary workplace. 

In fact, the umbrella company concur with this.

It is true that where a contractor has incurred travel costs to temporary workplaces during the assignment, which have not been reimbursed, the contractor can claim tax relief via the P87 form.

Umbrella companies can’t pay travel expenses if the end client/agency hasn’t reimbursed them

There is another rule that prevents umbrella companies from reimbursing expenses for travel to a temporary workplace. 

Under this rule, if the level of pay is dependent on the expenses, then the expenses cannot be paid tax and NI free. If the umbrella company does NOT receive additional payment from the end-client (or agency) for the expenses, they cannot take some of the money they have received (for the work performed) and allocate it to expenses – even though the contractor has incurred the cost.

If they did, the amount available for pay and Employers NI would be lower and so the pay would be dependent on the expenses, and the rule above applies.

Umbrella companies CAN pay certain travel expenses if the end client/agency HAVE reimbursed them

In your case, the end-client has reimbursed the agency, who have, in turn, reimbursed the umbrella company. These expenses can, therefore, be paid to the contractor without affecting the level of pay. The pay is dependent, not on the expenses, but solely on the hours worked and the hourly rate.

Correcting the position

It seems that the umbrella company would have reimbursed the expenses, at the time, if they had been aware, that they were ‘allowable’. This suggests that the pay was incorrect, as the pay and Employer National Insurance included the amount which the umbrella company had received for – and would have paid out as – expenses.

It is certainly easier to make a payroll correction in the year in which it occurred, but HMRC acknowledge that errors in the payroll may come to light after the end of the tax year. An employee should not lose out, just because the error occurred close to the end of a tax year.

All employers have to submit an Employer Payment Summary (EPS) after the end of the tax year.  In most instances, any corrections will have been made prior to submitting this. Many employers, including umbrella companies, might consider this to mean that any further corrections that come to light cannot be adjusted through the payroll.

But, and it’s a big ‘but.’ HMRC has a mechanism (not widely known about), whereby the employer can make a correction to a previous year’s payroll by submitting a Year End Adjustment FPS (YEA FPS) to HMRC. 

This can be done regardless of whether or not the final EPS has been submitted for the year. In fact, HMRC advise that adjustments going back up to six years can be made in this way!

Many of the payroll software packages used by umbrella companies are able to submit the Year End Adjustment FPS. However, unless you know to look for it, it is easily missed!

Finally the good news is…

Your umbrella company could amend last year’s payroll to reflect the gross pay and Employer’s NI as it would have been without the expenses, and submit the YEA FPS based on the amended figures. They can then refund to you the contractor, the difference between the original net pay for the year and the amended net pay for the year plus expenses. Good luck!

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