How umbrella expenses will get tougher still

It might date back to March 2015, but a clause from HMRC is set to sting an estimated 400,000 umbrella contractors from April, in a tax grab that some say will cause more financial hardship for households than those severe but now scrapped tax credit cuts, writes Carolyn Walsh, director of CWC Solutions.

Ongoing relief to be removed

In short, tax relief on your expenses as an umbrella contractor will no longer be given at source; it will soon have to be claimed at the end of the tax year in a self-assessment tax return. 

Found at section 289A of the Finance Act, the clause will be in force for the 2016-17 tax year. It effectively states that for reimbursed expenses which are allowable expenses, no tax liability arises as long as the reimbursement is NOT made by virtue of a salary-sacrifice arrangement and that the tests imposed by Section 336 ITEPA 2003 have been undertaken by the payer or employer.

But an amendment to Section 289E of the Act, on salary sacrifice arrangements which also applies to the 2016-17 tax year, states: “In this section ‘arrangements’ includes any scheme, transaction or series of transactions, agreement or understanding, whether or not legally enforceable.”

No magic bullet

The combined effect of this amendment is that it puts paid to any hope that any provider is going to come up with an 11th hour arrangement that would be a magic bullet that can shoot holes in tax legislation which, in this instance, will restrict tax relief on T&S expenses for all employment intermediary employees.

The only ‘good’ news is that if expenses are allowable then reimbursements that an employee has not received do not impact their entitlement to relief. There are no grounds on which HMRC can refuse relief to an employee who has incurred and paid allowable expenses, and who has for whatever reason refrained from claiming reimbursement from their employer. A taxman not able to refuse is therefore bound to issue a rebate.

In other words, while there is no framework from April by which umbrella contractors can claim tax relief on a week-by-week (or monthly) basis, when employees refrain from this, there is also no framework by which HMRC can refuse claims for tax relief for allowable expenses. And for travel and subsistence expenses; that’s all set to be down to status.

Notes on allowable expenses

Another warning is being sounded though. For umbrellas and other employers, HMRC is advising that the general rule for employees’ expenses is already very restrictive. In fact, all of the tests imposed by Section 336 ITEPA 2003 must be passed before a deduction is obtained. Plus remember, the rules for expenses on travel are different to the general expenses rules. The tests that apply before a deduction can be permitted under Section 336 are

* the expense must be one that each and every holder of that employment would have to incur

* the expense must be necessarily incurred

* the expense must be incurred in the performance of the duties of the employment

* the expense must be incurred and paid

* the expense must be wholly and exclusively so incurred

Final thought

There are umbrella companies which use what appears to be a standardised expense policy.

And umbrella companies which have processed genuine work expenses under an overarching contract of employment may survive until next April. But if umbrella companies are treated by HMRC as service companies, then MSC legislation could easily apply. None of the tax relief provided will be accepted by HMRC which would impact the umbrella company employees from the current tax year and potentially back to April 2014. Whatever happens, I'm sure there are more surprises in store for umbrella companies and not necessarily good ones. Many people, understandably, will be hoping I’m wrong.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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