Contractors, no need to be in a spin about expenses

Claims about claims. Who’s an honest umbrella contractor with expenses meant to believe?!

One week contractors are told that they’ve got so few claimable expenses left that they can be counted on just one hand; the next they’re told “there are still a number of expenses” that ‘SDC’ brolly workers can claim.

It’s all enough to send contractors in a spin, and dear contractors, you don’t need to be, writes Carolyn Walsh, managing director of Andraste Accounting.

First and foremost, the taxman is not actually denying contractors’ status and their rights to tax relief, when it is their right. Something else that has been claimed of late, unhelpfully.

It’s true though, the rules on when a meal allowance must be treated as ‘general earnings,’ which means subject to deduction under PAYE, are indeed convoluted to say the least. Before this article tackles them, it shouldn’t be forgotten that when any allowance is paid in addition to a contractor's basic pay and where PAYE regulations provide that the allowance must be treated as general earnings, a higher rate taxpayer receives 48% of that additional allowance after tax and NI has been deducted, which would partially offset the cost of a contractor's expenditure on meals in any case.

The T&S whopper

For a higher rate taxpayer, the cost of paying for a meal from income which has been subject to deduction under PAYE is a whopping 208% of the cost of the meal! So while a meal allowance which is payable on a tax and NI free basis within PAYE regulations has a neutral impact on a contractor’s tax and NI position, more importantly, the additional allowance when used to cover the cost of say a £10 meal, would save that taxpayer £20.80 in real terms.

Therefore it’s of great value to know when an allowance can be treated as deductible and, to this end, HMRC has recently published guidance aimed at contractors on when tax relief is allowable on travel expenses and in consequence and in most cases, subsistence (meal) expenses. The HMRC scenarios are many and varied.

PSC contractors and T&S allowances

When a contractor is supplying services to clients as a personal service company, which means more than 50% of the company income is generated from that director personally providing services to clients, and intermediaries’ legislation (IR35) doesn’t apply, then all travel and subsistence costs which are reasonable and representative are deductible.

Yet it is right to query whether being paid a meal allowance along with employees of the client may be seen as the client treating the contractor as ‘part and parcel’ of the company, and therefore making it more likely that the engagement falls inside IR35. But with an opinion from a status adviser or HMRC that the engagement is in fact outside IR35, taking into account the offer of a travel allowance, if the client is willing to pay any additional sums the contractor would be entitled to invoice for it, and treat it as company income. This would have no detrimental impact on status or entitlement to claim tax relief.

Where a contractor is working inside IR35 and a meal allowance is paid in addition to basic income, although travel and generally subsistence expenses are not deductible, if an additional allowance is available, it is still worth 48% of the allowance in real terms, as explained at this article’s outset.

So for a PSC contractor supplying services to a client, the situation is fairly clear cut and the tax/NI position depends entirely on whether the contractor is operating inside or outside IR35. An opinion on this can be sought from the Revenue’s IR35 unit or through an IR35 Contract Review by reputable status experts in the private sector. The latter are still trusted infinitely more than HMRC which you could argue is somewhat of a shame, given that HMRC’s service is entirely free. However I regard the private sector’s best reviews – in terms of unbeatable safety for contractors – as the ones that include a referral to HMRC for confirmation of the adviser’s opinion.

Where T&S rules cover umbrella contractors

I digress. For a contractor supplying services via an employment intermediary (usually an umbrella company), the decision-making process is fairly similar to the consideration of the intermediaries’ legislation (IR35). The basic premise is that an employee of an employment intermediary is not entitled to tax and NI relief on travel and subsistence expenses, unless he or she would have been supplying services to the client on a self-employed basis if the employment intermediary didn’t exist

In such an instance, the new restrictions on T&S tax relief do not apply and although being treated on the same basis as employees may affect a contractor’s status, again if self-employed status is absolutely assured and confirmed by an adviser or HMRC, then invoicing for any additional payment which is available to the contractor will not affect his or her status or entitlement to tax/NI relief. So far, so good.

Managed Service Companies

But it is has become common practice for contractors who do not wish to go to the trouble of setting up and managing a PSC, to be paid via a PAYE umbrella company and HMRC has long accepted that there is a genuine need in the temporary labour market for these type of managed service companies (MSCs).

However, for reasons that can only be guessed at, the new rules for a PAYE umbrella company employee are particularly succinct and the position of such a contractor may already have been decided, so no matter how a T&S allowance is paid or if T&S expenses are paid for, the contractor’s underlying status is not going to be taken into consideration anyway.

A PAYE umbrella company will generally pay a contractor with most of the income generated being subject to deduction under PAYE. This would have normally been sufficient to leave any company which is involved in the supply of individuals and their services to end-clients, outside MSC legislation. But for the purposes of deciding whether tax relief is allowable on T&S, an exception to this rule has been created.

In particular, where a managed service company provider exists, and this could simply be an agency that works ‘in concert’ with an umbrella company and perhaps overtly encourages a contractor to use particular umbrella or managed service company, then MSC legislation will apply.

For a contractor in this situation, this simply means that no relief on T&S expense is allowable, even when paid in addition to basic income or paid as an out-of-pocket expense. So claims being bandied about by umbrella companies at present that these expenses can be reclaimed under a self-assessment tax return, or a P87, at the end of the tax year should be verified as fact, before you commit to paying the umbrella company any fees.

Still in a spin?

Contractors working through any PAYE umbrella company should seek advice from all reputable sources about their entitlement to tax relief, in the same way that PSC contractors should, in theory at least; contact status advisers or the IR35 helpline about their position. HMRC’s own Employment Intermediary unit (Telephone: 03000 555995) will give advice that will help in the decision-making process, as will independent experts in the private sector through ContractorUK’s Contractors’ Questions and other channels.

As to the advice umbrella contractors might receive from HMRC, I have heard that officials are informing umbrella company employees who would otherwise be entitled to claim tax relief on T&S expenses to set up and operate as a PSC, and then gain an opinion from their IR35 unit. An opinion from an IR35 adviser would suffice too.

Final thoughts

Perhaps this sort of advice from the tax authority is much-needed proof that HMRC is not ‘out to get’ all contractors or to ‘take away’ contractors’ ability to get tax relief.’  What’s more clear is that there is not, and in my opinion never has been, a ‘one-size-fits-all’ solution. Let’s hope the Revenue remembers this when it comes to putting forward the public sector’s new IR35 framework, which I’m helping the department draw up in the hope of providing greater certainty to contractors, their agents; advisers and clients.

Editor's Note: Related Reading -

Call to axe IR35 and T&S reforms amid Brexit

Gauke defends contractor T&S legislation

Contractors' agencies in a spin about expenses

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Written by Carolyn Walsh

With over twenty years’ experience in the sector, Carolyn assists freelancers, contractors, agency and umbrella company workers, interpreting tax legislation and guidance with a no-nonsense approach.
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