Umbrella company expenses rules: explainer

A recommendation to contractors, here, not to use an umbrella company offering Travel and Subsistence expenses.

And a law firm’s newsletter in our inbox saying: “For umbrella companies that do still reimburse travel and subsistence expenses [our advice is…].”

So which is it?

In fairness, the landscape of Travel and Subsistence (T&S) expenses for umbrella company workers has undergone a significant transformation, writes Crawford Temple, CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.

Two big changes to HMRC umbrella company expenses rules

And this transformation wasn’t recent – it was way back in 2016, in the shape of two significant updates.

The first update was introduced through the Finance Act of 2015, where new HMRC rules were introduced for employers reimbursing employee expenses.

These rules contained a provision removing employers who operated a relevant ‘salary sacrifice’ scheme from being accessing the rules.

What did the rules say?

Well, in simple terms, where a worker reduces their taxable pay by offsetting expenses from their earnings, this is ‘caught,’ and prevents almost all expenses being claimed. Statutory mileage allowance is the main exception.

Next, it’s the mass revoking of umbrella company dispensations

At the same time, HMRC confirmed that all existing “dispensations” -- a process that allowed an employer to agree typical expenses with HMRC and so resulting in a ‘light-touch’ checking regime by HMRC, were revoked.

Many umbrella companies relied on these dispensations to process expenses at volume.

Now, let’s look at the second update to expenses in 2016.

The introduction of the Supervision, Direction or Control (SDC) test

This second change in expenses rules centred on the concept of a new test -- for Supervision, Direction or Control (SDC).

And this SDC rule has had far-reaching implications for contractors, umbrella companies, and the broader temporary workforce sector.

As we approach the eight-year mark since these changes took effect, the nuances of the legislation may be why that there is the perception (at least), of conflicting messages in the umbrella marketplace, including from respected legal experts and umbrella advisers.

The 2016 expenses legislation for umbrella companies was paradigm shift

Before April 6th 2016, many contractors working through umbrella companies could claim tax relief on their travel and subsistence expenses, often under the guise of “overarching employment.”

This arrangement allowed workers to treat multiple assignments as part of a single, continuous employment, thereby making the different sites “temporary” places of work, thereby justifying the tax-free status of their T&S expenses.

The risk for an umbrella provider was if they did not get the contractual terms right and support that with the right operational processes and procedures, it could allow HMRC to challenge the ‘overarching status.’ And if HMRC were successful, it would likely mean that tax would be due on expenses previously allowed as tax-free.

Supervision, Direction or Control

However, the 2016 legislation brought about a fundamental change. The concept of overarching employment was effectively dismantled for the majority of contractors, replaced by a new framework centred on the principles of Supervision, Direction or Control.

Under these new SDC rules, each assignment is treated as a separate engagement for employment purposes, rendering many assignments as a permanent place of work.

Where a workplace is permanent then there are no allowable expenses. This shift was designed to create a more equitable system and prevent what HMRC perceived as potential abuse of tax relief on T&S expenses.

Understanding the interaction between Supervision, Direction or Control and Off-Payroll Working

With the introduction (and subsequent expansion to the private sector), of the Off-Payroll Working rules, it has become increasingly difficult for any umbrella company to assess workers as outside of SDC.

The SDC legislation is written so that it is deemed to apply unless it can be proved that it doesn’t apply -- which is the opposite of IR35 legislation.

It appears to me that a shrewd HMRC quickly learned from its difficulties in enforcing and winning IR35 cases and so with SDC, they wanted all the aces in their hand.

What about expenses where Supervision, Direction or Control applies?

Where SDC applies, then the test for workplace status means that each assignment is treated as a separate engagement for employment purposes. Therefore, where a worker attends the same site for the duration of the assignment, that would be considered ‘permanent’ and no allowable expenses could be claimed.

There are nuances to this however, and those nuances could further impact sectors such as healthcare and education (which this article has not been referring to and will not address, so seek tailored expenses guidance if you operate in those sectors).

Key to remember here; workplace status determines whether any expenses are allowed tax-free, and relevant salary-sacrifice rules define the limit of what a contractor can claim from their earnings.

Implications of the 2016 expenses rules for umbrellas and contractors

For umbrella companies, the 2016 legislation changes brought significant responsibilities and potential risks.

As the legal employers of contractors, umbrellas are required to operate PAYE for their workers correctly and failing to do so results in liabilities for the umbrella. Assessing the status of workplaces and subsequently what, if any, expenses are allowed now holds a much greater risk.

The other impact is that it now takes a significantly greater amount of time, as with the removal of dispensations, all expenses have to be checked line by line, with the required level of detail to ensure they meet HMRC’s requirements.

This assessment must be thorough and well-documented, as the umbrella company bears the liability for any incorrectly allowed tax-free expenses.

It's important to note that if an umbrella company allows tax-free expenses that don't meet the required standard, HMRC would seek to recover any tax debt from the umbrella company itself -- not from the individual contractor.

This places a substantial burden on umbrella companies to ensure compliance and maintain accurate records.

Umbrella companies today, in 2024-25

In the years since the 2016 legislation took effect, we've seen a marked decrease in the number of umbrella contractors able to claim tax-free expenses.

For the vast majority of umbrella workers, especially those in roles where they work under client supervision or follow set procedures, tax-free expenses are no longer a viable option.

However, it's crucial to understand that the legislation doesn't entirely prohibit expense claims. In cases where a workplace meets the criteria for being “temporary,” tax-free expense reimbursements may still be possible.

But these situations are relatively rare and require careful documentation and assessment.

The future for umbrella company contractors

The 2016 legislation changes have permanently altered the expense landscape for umbrella workers, and while it has reduced flexibility for many contractors, it has also brought greater clarity and uniformity to the sector.

For contractors, understanding these expenses rules is crucial for managing their finances effectively. For umbrella companies, strict adherence to the legislation is not just a legal requirement but a cornerstone of responsible business practice.

As the ‘gig economy’ continues to evolve and new working patterns emerge, we may see further refinements to the 2016 legislation. However, the principles applied are likely to remain a fundamental part of the regulatory framework for the foreseeable future. Staying informed and compliant will be key for all stakeholders in the temporary workforce sector.