Paid expenses put me in IR35? Paid expenses put me in IR35?
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  1. #1

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    Default Paid expenses put me in IR35?

    Hi,
    I've been on my first contract for six months as an umbrella, now changing to Ltd. I started receiving expenses after three, because my place of work changed to a location beyond commutable distance. Dave Chaplin's Contractor's Handbook says (in the IR35 chapter):
    "Contractors pay their own expenses: Some clients are prepared to pay certain contractor expenses. This can attract attention as it can be seen as a sign of employment. You should include expenses as part of your rate, or only claim expenses for agreed exceptional items such as if your Manchester-based project required you to visit the client's Brussels office."

    Is this really true? If I run a plumbing business, I can charge a call-out fee to cover my expenses in travelling to and parking at a client's premises. How is this any different except the quantity of time? According to Hays, they have many other contractors who charge expenses. I don't see how charging expenses makes me a disguised employee.

    I'm coming up to renewal. If I can no longer charge expenses for fear of being inside IR35, I'd have to negotiate adding it to my day-rate, which I'd prefer not to have to do.

    Advice welcome, many thanks.

  2. #2

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    Quote Originally Posted by stonecircle View Post
    Hi,
    I've been on my first contract for six months as an umbrella, now changing to Ltd. I started receiving expenses after three, because my place of work changed to a location beyond commutable distance. Dave Chaplin's Contractor's Handbook says (in the IR35 chapter):
    "Contractors pay their own expenses: Some clients are prepared to pay certain contractor expenses. This can attract attention as it can be seen as a sign of employment. You should include expenses as part of your rate, or only claim expenses for agreed exceptional items such as if your Manchester-based project required you to visit the client's Brussels office."

    Is this really true? If I run a plumbing business, I can charge a call-out fee to cover my expenses in travelling to and parking at a client's premises. How is this any different except the quantity of time? According to Hays, they have many other contractors who charge expenses. I don't see how charging expenses makes me a disguised employee.
    Because Clients pay permie expenses but not the expenses of suppliers generally. Suppliers incur the cost whilst doing business so they charge the client via an invoice. Not an expenses system. The terminology makes the difference here. You charge for cost, not incur expenses from the client.

    It also doesn't make you a disguised employee, it is a flag of disguised employment albeit a fairly minor one. If the client has the same policy for all permies & suppliers and they won't budge it won't really be held as a sign of disguised employment so wouldn't worry. If you are on expenses and other contractors on site aren't then you need to worry a little.

    I'm coming up to renewal. If I can no longer charge expenses for fear of being inside IR35, I'd have to negotiate adding it to my day-rate, which I'd prefer not to have to do.

    Advice welcome, many thanks.
    Negotiate to be re-imbursed via invoicing not their expenses system.
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  3. #3

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    It certainly wouldn't be a determining factor if you were subject to an IR35 enquiry - there are other, far more important issues.

    The main consideration would be if you were following the same rules and process as a permanent employee.

    It's the sort of thing that would be picked up by HMRC, but if you had a genuine right of substitution, control etc., it's not going to cause too many problems.

    Like you/Hays say, it's certainly common practice in the contracting industry.

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    Thanks. I'm going to treat this as a minor one and will not negotiate to add expenses to day-rate. I used to work for a consultancy and we used to charge clients expenses all the time. I don't see how this prevents ours being a client-supplier relationship. Hays say it's common too.

    However, Hays' Terms of Assignment is very misleading. On the face of it, it implies control and fettered substitution so puts me inside IR35. I'm battling to get at least the substitution clause changed, because I can't see how a cleaner one would impact them commercially\legally. They are just being obstructive out of a grossly warped risk-aversion.

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    You don't have to increase your day rate to cover expenses; if your client is willing to reimburse you for certain costs you incur, then YourCo can invoice for them - just add another line to your invoice "Expenses incurred as part of service - £xxx". You may choose to re-bill at whatever rate you agree with your client...net of VAT, gross of VAT, a flat rate etc. It also doesn't matter what you're re-billing for as long as your client has agreed to pay for it - HMRC expenses rules do not apply here as you're simply billing for things as part of your service.

    If you incurred the expenses out of your pocket, then you should reclaim those directly from YourCo in accordance with HMRC rules for employee expenses - you may need to report this on your P11D. You don't have to though; you could just retain the extra income YourCo has made from re-billing the expenses as profit.

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    Quote Originally Posted by TheCyclingProgrammer View Post
    You don't have to increase your day rate to cover expenses; if your client is willing to reimburse you for certain costs you incur, then YourCo can invoice for them - just add another line to your invoice "Expenses incurred as part of service - £xxx". You may choose to re-bill at whatever rate you agree with your client...net of VAT, gross of VAT, a flat rate etc. It also doesn't matter what you're re-billing for as long as your client has agreed to pay for it - HMRC expenses rules do not apply here as you're simply billing for things as part of your service.
    Why is this better than negotiating a day rate to include average expenses?

    Putting line items on an invoice is like inviting someone to comment on your choice of restaurant/accommodation, class of travel, etc. and for them to demand receipts and mis-apply VAT rules.

    If the expenses are not overly variable then including it in the rate is much cleaner IMHO. You can still negotiate for exceptional expenses to be billed separately, but even these can be charged at a flat rate, e.g. £xxx per overnight stay.

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    Quote Originally Posted by Contreras View Post
    Why is this better than negotiating a day rate to include average expenses?
    I didn't say it was better, its just another option. It may work out cheaper for the client to reimburse your expenses as incurred rather than pay an overall increase in rate, its just a matter of negotiation. Personally, I don't re-bill my normal business expenses (travel etc.) as I do see it as part of my overall rate but I would re-bill additional expenditure with my client's agreement (and this is specified in my contract). I don't go through agencies so its easier to negotiate this kind of thing.

    Putting line items on an invoice is like inviting someone to comment on your choice of restaurant/accommodation, class of travel, etc. and for them to demand receipts and mis-apply VAT rules.
    Perhaps, although you don't necessarily have to break everything down into individual items. Mis-application of VAT rules does seem commonplace, especially amongst agents, although its really not a matter of "VAT rules" per se whether you re-bill at net or gross, just a case of whatever the client/agency's policy is.

    If the expenses are not overly variable then including it in the rate is much cleaner IMHO. You can still negotiate for exceptional expenses to be billed separately, but even these can be charged at a flat rate, e.g. £xxx per overnight stay.
    I agree that accounting for general expenditure as part of your rate is preferable and a flat rate keeps things nice and simple too.

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    Quote Originally Posted by Contreras View Post
    Why is this better than negotiating a day rate to include average expenses?
    Factoring it in the rate works well if expenses are incurred regularly. For irregular travel, it makes sense to either ignore this or invoice separately (e.g. for international travel). In that case, I only include a single line in the invoice and use a flat daily rate plus actual flight and hotel costs (for example). Invoicing expenses just comes down to what you've agreed with the client - if it's agreed in advance it shouldn't require any explanation.

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    Don't forget if VAT rated, invoiced expenses must have VAT added to either net or gross expense incurred but if you are on flat rate scheme net will cost you most of the VAT; agree gross in contact if possible but since clients don't like as they see it as paying VAT twice (£144 instead of £120 on net £100 hotel expense).
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    Quote Originally Posted by kyber View Post
    Don't forget if VAT rated, invoiced expenses must have VAT added to either net or gross expense incurred but if you are on flat rate scheme net will cost you most of the VAT; agree gross in contact if possible but since clients don't like as they see it as paying VAT twice (£144 instead of £120 on net £100 hotel expense).
    Good point re: adding VAT on top regardless of what you charge for your re-billed expenses.

    This has been discussed on here a million times and whilst you are correct (agents in particular don't seem to get the VAT on VAT thing) its worth pointing out that even if you only re-bill net of VAT (because client insists, agents don't understand etc.) you might still come out on top even on the FRS because your FRS surplus is designed to cover things like this. Obviously it depends on how much expenditure you're incurring overall.

    Definitely try and get it explicitly in writing if you want to re-bill gross.

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