Contractors' Questions: Who’s at risk if HMRC rejects my expenses, the umbrella or me?

Contractor’s Question: I’m having a friendly back and forth with my umbrella company over an item that they reckon I can put through to them on expenses, but which I’m not sure about.

In the event that they are wrong, and HM Revenue & Customs challenges/rejects the claim, is it me or the umbrella company who the error, and owed tax, would come back on? The item is not a lot on its own, but would rack up a noticeable amount if claimed regularly. If there is an HMRC probe into it, who would take the heat, me or the brolly?

Expert’s Answer: The current HMRC guidance on Expenses and Benefits is over 130 pages long so does not make for easy reading. As you are experiencing, opinion on what can and cannot be claimed as an expense is often divided.

The first thing to consider is whether or not you have actually incurred a cost and the second is whether or not that cost has been incurred wholly and exclusively because of the assignment. If you can answer ‘yes’ to both those questions then there is a good chance you will be entitled to tax relief on the cost. However, it is easy to convince yourself that a purchase meets these requirements when, in fact, there could be what’s referred to as ‘duality of purpose’. For instance, you may think to yourself ‘I can’t do this contract without a new laptop’ but, in reality, it’s highly unlikely that you would use a new laptop just to complete work for this assignment, and therefore the ‘exclusively’ rule will not have been met.
 
The way this question has been worded would lead me to think that the issue you’re having relates to subsistence i.e. meal costs. If you are travelling to a workplace that meets HMRC’s definition of a “temporary” workplace then you are entitled to tax relief on the cost of meals; in order to allow this your umbrella company must have an overarching contract in place.

If your umbrella company is processing an amount, as an expense, for each day that you work regardless of whether or not a cost has been incurred then the tax relief you would receive would not be allowable. HMRC have various ways of both detecting and dealing with this sort of event. And as to whose responsible, because income tax is a personal tax any additional tax owing as a result of your having received relief when such relief was not due could be recovered from you. This is especially the case where HMRC considers that you should have known that you were not entitled to the relief.
 
However another option open to HMRC, if they find that the umbrella company’s dispensation has not been applied correctly, is to secure a settlement from the umbrella company for failure to operate PAYE correctly, certainly to cover Employer’s National Insurance Contributions and possibly Income Tax which should have been deducted.

The expert was Lisa Keeble, managing director of ContractorUmbrella.

Thursday 7th Nov 2013