**** Expenses and Umbrella Companies Post 6th April 2016: Please note as of 6th April 2016, no "compliant" umbrella company will be able to process non-chargeable expenses for tax relief purposes due to a change in Legislation included within the Finance Act 2016. Click here to find out more... ****
ARCHIVED PAGE AS OF 6TH APRIL 2016
Below are some of the common misconceptions contractors have whilst using an Umbrella Company and the actual truth behind the myths:
Fact: When an accountant processes expenses he will normally need to record the details on an Inland Revenue form called a P11D and also be able to produce receipts to support those expenses. This creates a great deal of work for an Umbrella Company so they apply for a dispensati from the Inland Revenue which allows them to process some expenses without having to record them on the P11D or file receipts.
However, the dispensation does not apply to you, as an individual, and therefore you must keep receipts for any expense that you claim. It is also not an indication of the expenses that you are entitled to claim – to claim an expense you must have first incurred the cost and it must be wholly and exclusively incurred in the performance of the contract.
Any amounts quoted on the dispensation are the limits up to which the Umbrella Company can process expense claims without recording them. If the limit shown for accommodation is £95 it does not mean that you can claim this amount each night that you stay away from home – if you only spend £65 you can only claim £65.
"H M Revenue and Customs does not "approve" any particular composite or umbrella companies" - Extract taken from an email we received from the Inland Revenue on 07/07/05
Fact: A subsistence payment is, by definition, one that does not have to be supported by receipts. The only subsistence payment permitted by the Inland Revenue is £5 per night (£10 if abroad) for each night spent away from home during the course of the contract. You must be able to produce receipts for any other costs that you claim as an expense; the Inland Revenue requires that you keep your receipts for a period of 5 years.
"I can confirm that contractors cannot automatically claim £21 per day (or any other amount) for each day they are at work. It is also worth saying the Inland Revenue would not give general approval of a company's expenses policy. A dispensation would never cover large amounts of unsupported expenditure" - Extract taken a letter we received from the Inland Revenue regarding daily allowances.
Fact: You can claim actual meal costs whilst you are working at a remote site i.e. away from your normal place of work or when staying away from home overnight but daily claims for meals are not permitted. It is the Inland Revenue's belief that you need to eat regardless of whether or not you are at work so the meal costs are not wholly attributable to the contract and can, therefore, not be claimed as an expense. "The cost of food, drink and accommodation is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live..." - Extract taken from the Inland Revenue website.
Fact: "In umbrella companies workers are treated as employees of the umbrella company and all payments to workers as employment income which is paid in the form of salary and allowable expenses. It follows therefore that what the worker has received from the umbrella company is the same as they would have received from any other company through which the worker operated and which treated all payments as employment income. Consequently the third condition is not met and the umbrella company does not meet the definition of a Managed Service Company." - Taken from Managed Service Companies Guidance published by HMRC on 10th July 2007.
Fact: All Umbrella Companies are controlled by the Inland Revenue. Your tax paid is dependant on your personal tax code, National Insurance contributions are a fixed percentage and you can only claim those expenses that the Inland Revenue approves. Remember, a dispensation means that the Umbrella Company does not need to see your receipts; it does not mean that you don't have to have them! The only factor that should affect your take home pay is the margin that the Umbrella Company retains.
Fact: Your net earnings will be affected by your tax code and the expenses that you can legally claim. An online calculator should operate using a standard tax code and a calculator that does not ask for your expenses will assume a figure. This means that the calculation will never be accurate as everyone's expenses are different.
Fact: Being paid salary and dividends would be more financially beneficial to you, however you can only legally be paid in this way if your contract is IR35 friendly (outside IR35) and you are receiving payment through your own personal Limited Company, over which you have complete financial and administrative control. From 6th April 2007 any involvement from a third party in running a Limited Company (other than accountancy services) would place you under the scope of a Managed Service Company (MSC) If you receive your payments via a third party or your contract fails IR35 (inside IR35) and you are running your own Limited Company, you can only be paid through PAYE.
Fact: This is in fact true, but if the contract doesn't reflect your actual working practices, it wouldn't help you in the event of an IR35 investigation. If for example, the contract states that you can provide a substitute worker, but in reality you can't, you could find yourself in a lot of trouble. If you are being paid a combination of minimum wage and dividends, and the Inland Revenue deemed you to fall inside IR35, you would be liable to pay back all the underpaid tax, a penalty and worst case scenario you could be prosecuted for tax avoidance.
Fact: New draft legislation has been produced after the success of the Artic Systems case in December 2007. From April 2008 it will be possible to pay part of your income to a partner, but only if there is a genuine commercial arrangement - this would however only be possible through your own Limited Company. For more information on the draft legislation please click here.
Fact: Moving Umbrella Company will not change the situation as the rule applies to your actual place of work rather than the company you use. A workplace is deemed as a temporary site providing your attendance lasts no longer than 24 months. After 24 months a workplace is viewed more as a permanent site, and if you spend 40% or more of your time at the same site, you are no longer able to claim travel between home and that place or accommodation expenses.
The following link gives an example of the 24-month rule, taken from the Inland Revenue website.
Fact: To an extent this is true - any expenses you incur will reduce the amount of tax you pay. You should just remember that in order to receive the expenses you will actually need to have spent the money on an allowable business expense, so whilst the income will go up, so do the expenses!
Fact: If you claim expenses fraudulently and the Inland Revenue becomes aware of it you will be investigated and you will be liable for any underpayments of tax and associated penalties. It is worth noting that the Inland Revenue does investigate at random and no company can offer you protection against an investigation.
“Where we find that the incorrect classification has been applied in respect of a particular engagement, we have a duty to ensure things are put right for the past and, where appropriate, for the future. Interest and penalties may be charged on any additional tax/NICs due as a result of any review or enquiry.” – Taken Directly from Inland Revenue website.
Fact: Using an offshore Umbrella Company can do the complete opposite potentially, leaving you facing a large tax bill and fine, as they have actually been illegal since 1987. Read our BN66 page for more information.
Fact: All Umbrella Companies pay through PAYE and your tax contribution is deducted, according to your tax code, each time that you are paid. Your taxable income will be reduced when you claim expenses BUT the Inland Revenue dictates what expenses you can claim and not the Umbrella Company and therefore your net earnings (or take home pay) should be the same whichever company you use.
For details of expenses permissible with the Inland Revenue, please follow this link.