Contractors confused about umbrella companies
Our recent survey revealed the most common misconception and potentially the most costly for contractors is the belief that they can claim a daily, fixed and un-receipted amount for subsistence, regardless of whether the workplace is temporary or not.
The majority of contractors polled believed that generally these expenses are covered, regardless of whether their workplace is temporary, based solely on the number of hours they worked. Ninety-eight per cent of contractors believe that they can claim tax relief on various amounts between £5 and £140 per day.
An HMRC spokesperson told CUK: "Employees are only entitled to claim expenses to cover travel and subsistence if they are working at a temporary workplace. To claim for expenses, contactors must have incurred an expense for the meal that they are claiming for."
Bob, the retired tax inspector, clarifies, "If the workplace is permanent then no claim – no matter how far you are away from home - if the workplace is temporary then subsistence is allowable."
In reality therefore, subsistence can only be claimed in certain circumstances and the expense has to be necessary while performing your duties during your contract at a temporary workplace.
For contractors who are on fixed-term contracts, HMRC's website states: "A workplace is not a temporary workplace if the employee attends that place:
- in the course of a period of continuous work at that place
- lasting more than 24 months, or
- when it is reasonable to assume that it will be in the course of such a period.
The broad effect is that a place at which the employee can expect to work for a period exceeding 24 months is treated as a permanent workplace from the outset.
Bob further explained: "The test for being able to claim travel and subsistence is twofold – first of all attendance at the workplace has to be for a period of limited duration or other temporary purpose – BUT where attendance at the workplace consists of the whole of the period of employment comes into play… it denies the relief. The law is quite clear that if the whole of the period of employment consists of working at the one location then the workplace is permanent."
However, he goes on to say that moving (or the probability of moving) from assignment to assignment for the same employer points to a temporary workplace: "Even though you go to the same place every day the place can be a temporary workplace if you are going to move somewhere else, or it is reasonable to assume that you will move somewhere else - and the 24 month rule is not broken…"
On a more positive note, about 79% of our survey respondents know that the expenses contractors are entitled to claim are determined by the HMRC and not the umbrella company. Unfortunately over 20% believe the contrary and almost 15% say their expenses were set by their umbrella company's dispensation.
Despite the regular discussions about dispensations on the Contractor UK bulletin board, dispensations are still misunderstood; almost 72% of the CUK sample believed that a dispensation gives you a green light to claim expenses without the need to keep receipts.
Most umbrella companies have dispensations which prevent the need for umbrellas to complete P11Ds (an HMRC form) for each and every allowable expense claim submitted by contractors. However, the contractor will still need to keep receipts and show evidence of expenses incurred. Mr Jones reflected: "HMRC will still expect the employer to have a robust audit trail – they may even have to improve their procedures in order to obtain the dispensation - and this will include provision by the employee to the employer of documentary evidence in support of expenditure."
The dispensation therefore applies to the umbrella company and not to the contractor, meaning that if contractors claim expenses they need to keep receipts with the exception only of "incidental overnight expenses" which applies if you are working away from home for 24 hours, for which the Revenue provides a modest allowance of £5 per night UK, £10 per night overseas. HMRC commented to CUK "The £5 and £10 if overseas subsistence rate relates to Personal Expenses allowances which are intended to cover telephone calls/newspapers etc…receipts do not have to be kept for this allowance provided they are staying away from home for business purposes."
The tax authority also told CUK: "Contractors have to keep receipts of expenses as the dispensation only applies to the umbrella company. It does not mean that contractors don't have to spend any money on meals and then claim up to £26 per day."
Another survey question on the subject of expenses quizzed our readers on the effect of expenses on take-home pay. Sixty per cent of contractors thought higher expenses meant more in their pockets come the week or month-end, failing to take into account that you actually have to spend the money in the first place in order to claim the expense. To put it in real terms:
A contractor earning £1000 per week with no expenses will take home about £624.00 A contractor earning £1250.00 per week with £300.00 would take home about £897.00 but, as they have already had to outlay the £300.00, their net income would actually only be about £597.00.
More positively, 60% of contractors polled realise an online calculator must take into account both the individual's earnings/rate and actual expenses in order to return an accurate reading. The calculator should state the tax code that has been used for the calculations, otherwise your take-home pay will be estimated. Similarly, any calculators just asking you to input a rate will assume an amount for expenses, providing you a guide only.
Over 20% thought 'HMRC approved' meant that the umbrella company's expenses policy had been approved, whereas in actual fact HMRC will not approve any umbrella company or their expenses policy. Phil Hogan, a policy officer at HMRC, has told CUK: "HMRC does not grant 'approval' to managed service/composite/umbrella companies."
To finish the poll results on a positive note – 75% of contractors are fully aware that umbrella companies will offer no protection in the event of an individual's tax affairs being investigated by HMRC. If you could then not produce receipts to support your expense claims, you may have to repay any tax relief you had received and could also be fined. However umbrella companies point out that if the HMRC investigation is a PAYE employer compliance review, then it is the umbrella company itself that would be under investigation and that company, rather than the individual contractor, would therefore be the first line of enquiry.
When asked what a contractor should look for in a good umbrella company, Crystal Umbrella replied: "A contractor should always look for an umbrella company to provide clear, concise and accurate information, given by experts that understand the current legislation. An umbrella's dispensation is for their own use not the contractor's, so always request that your umbrella company provides you with a personalised illustration and a clear expense policy backed up with detailed information on what is and what is not claimable."
Payscheme Plus says that as well calculating the overall annual return from the umbrella, "look at the application process and the manner in which the individual is going to be looked after over the coming months and years to come. In life, personal recommendation rings the loudest and if there is no one singing the praises of the umbrella company, insist on references."
Reflecting on the findings, PlanIT Services told CUK: "The confusion surrounding the claiming of expenses through Umbrella companies results from some complex tax rules combined with misinformation and spin often propagated by the more unscrupulous providers. It is a minefield for the contractor to establish the reality of what different Providers offer and to determine the compliance of that offering. Suffice to say that caution and common sense should be exercised and the contractor should seek out professional providers who give the advice to only claim legitimate expenses that have been genuinely incurred and receipted."
At a glance – CUK quizzed IT contractors on umbrella companies :
98% cited circumstances in which it is wrong to claim allowance for daily subsistence
78% wrongly believe they will be better off if they have higher expenses
71% don't correctly know what a dispensation means or requires of them
66% wrongly believe that HMRC has and can 'approve' umbrella companies
40% don't know how to accurately estimate their earnings using an online calculator
20% wrongly believe that their umbrella determines what expenses they can claim.
Contractor UK undertook the survey in 2008 to highlight the confusion many contractors feel when choosing an umbrella company and to subsequently publish some straight facts to help those contractors choose a reputable umbrella. We would also say that there are many highly reputable umbrella companies in the marketplace, which will provide a good service for contractors not wanting the paperwork of running a limited company.
Our thanks to Bob, the retired tax inspector.
Click here for CUK's directory of umbrella companies.