Contractors' Questions: Is my brolly right to tax expenses as I plan to quit?

Contractor’s Question: I’ve been working for an umbrella company as a contractor for a big company. This company agreed that motoring/travel expenses would be paid at cost. So every week I received car parking and road toll monies, plus fuel allowance at £0.15p a mile.

The company (through an agency) wanted to extend my contract. However, I did not wish to extend, so I took up an offer of a permanent job elsewhere. Subsequently, I handed in my notice of termination to the umbrella. But on receipt of my notice, the umbrella company started taxing the above expenses. Is this permissible practice?

Expert’s Answer: The short answer is yes; your umbrella company is operating correctly.

A compliant umbrella company is an employer and like any employer, it’s free to pay you any amount for whatever it wants to. But there are UK tax rules set out by HM Revenue & Customs dictating how payments must be treated, and again, like any employer, it has to adhere to these rules.

So more than just being “permissible” for the umbrella to start taxing your expenses, it is actually necessary treatment for your particular scenario and they’d be wrong not to handle it the way they have.

When you become an employee of an umbrella company, you do so under what’s known as an overarching contract of employment.

There are a number of obligations on you and your employer as you would expect to see in any employment contract. As a professional contractor, you agree that you will source and work on a succession of short-term assignments with end-clients/hirers, in order for the umbrella company to bill for the work you are carrying out and generate sufficient profits to pay you from.

The contract states that your home address is your permanent place of work, where you will spend time sourcing those assignments and carrying out necessary administration.

Rather than normal commuting, the sites you are visiting on these short term assignments are temporary workplaces, which enables your employer to reimburse you for expenses you incur while visiting those places, typically travel and a daily meal allowance.

The important thing to remember is that there must always be an intention or expectation to work on a succession of assignments for them to be seen as temporary.

The moment there is no longer an expectation of a successive assignment after the one you are currently working on, it is seen from that moment onwards as a permanent workplace, and as a result, you cannot be reimbursed tax free for any expenses you incur in visiting the workplace.

In your case, once you had given notice of your intention to resign from the umbrella company, you removed the intention to work on another short term assignment. Should you now join another umbrella company and state up front that you’ll only be working on ONE assignment, you should NOT be reimbursed any tax free expenses from the outset, as there is no intention of successive assignments from the start.

Compliant umbrella companies ensure that your income is correctly treated for tax, so there are no long term implications for workers OR the recruitment agencies that outsource the employment of temporary workers to them.

The expert was Damon Cochrane, operations director at Orange Genie Group.

Wednesday 27th May 2015
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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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