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Types of expenses

Anyone who works for themselves will know that there are certain things that they can claim as expenses, but if you choose to work through an umbrella company then your expenses will fall under one of two categories: chargeable and non-chargeable.

Chargeable expenses are those costs which you incur in the course of your business that your end client or your agency will reimburse you for. Non-chargeable expenses are costs which you have incurred whilst working on an assignment, but which aren't reimbursed to you. You will need to keep a record of these for your umbrella company who will count them as tax benefits when they pay you.

Non chargeable expenses are deductible from your profits for the purposes of calculating your tax bill. For example, a contractor who has earned £1,000 gross, but with £200 worth of non-chargeable expenses will only be taxed on the difference between the two: £800.

Do I need receipts?

You should always keep receipts for any expenses that you wish to claim. Although you will not need to submit them to HM Revenue and Customs (HMRC) initially, if you are subject to an investigation or audit, then being able to prove your outgoings will make it a lot easier to show how your expenses have been incurred.

If you are investigated and cannot show receipts or any other proof of your expenses, then you could be required to pay back any tax owed and it’s likely that you will also have penalties applied and be charged interest for the time between the expenses being claimed and the discrepancy coming to light. You could even be charged with tax evasion, so it’s definitely worth keeping all your receipts in order to avoid either paying too much tax or risking the consequences of claiming unprovable expenses.

HMRC can launch an investigation up to six years after your tax return has been submitted, so you could be investigated at any point during that time frame, so you should keep your receipts for six years after the January 31st tax return deadline.

What expenses can I claim?

Travel and accommodation

If you are a contractor employed through an umbrella company, then any claims for expenses relating to your assignments will be subject to the following rules:

  • Multiple assignments – if, during the course of your employment with an umbrella company, you are working on a more than one contract, comprising a range of different workplaces, then you will be able to claim expenses. If you are only working on one assignment whilst employed by an umbrella company, then HMRC would consider you to have a permanent workplace which means that travel and accommodation expenses cannot be claimed.
  • Contract duration – If a contract lasts for less than 24 months, it is considered a temporary workplace for the purposes of HMRC and you can claim related expenses for such an assignment. If a contractor can reasonably expect that their contract is going to last for longer than 24 months, then they should cease claiming travel and accommodation expenses for that assignment. If you undertake an assignment which you know will last for longer than 24 months at the outset, then you will be ineligible to claim expenses for travel and accommodation from the commencement of the contract. If you only learn that you will be working there for longer than 24 months after you have started the contract, then you must stop claiming expenses from that point. If, after 24 months, you are spending more than 40% of your time at a single workplace, then you can no longer claim travel or accommodation expenses. If your client or agency chooses to reimburse you for these costs, then this becomes a taxable part of your income.

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Other allowable expenses

Some of the other expenses you will incur as part of your contract are also allowable, and the more common of these include:

  • Travel and subsistence – when travelling to a temporary place of work, you can claim 45 pence per mile for the first 10,000 of travel in your own vehicle and 25p per mile for every mile thereafter. This fixed price has been worked out to cover fuel, insurance, road tax, maintenance and depreciation so you may not claim for any additional costs associated with running your vehicle. You can also claim 20p and 24p respectively for travelling by motorcycle and bicycle, and 5p per mile for travelling as a passenger in someone else’s car. You can claim for public transport but you must keep your receipts or tickets, and if you claim for the hire of a car, then you cannot claim mileage but you can claim for any fuel you purchase if you keep the receipts. Subsistence is considered any ‘extra expense’ you incur, so you cannot claim for a packed lunch, but you can claim if you need to purchase a meal taken as part of necessary travel.
  • Secondary accommodation expenses – if you are assigned to a workplace which is too far away to travel to from your home, then you can claim the cost of a hotel or bed and breakfast. You can also claim the cost of renting a property if you take on a property closer to the client’s site. You can claim council tax bills for your rented property, but you may only claim utility bills if your family remains in residence at your main residence as that means that the second property’s bills are an additional expense.
  • Additional meal costs – if you need to purchase a meal as an additional expense associated with staying in a hotel or B&B, because additional meals are not included in the cost of your accommodation. If you have rented accommodation with facilities for cooking, then additional meal costs are not allowed as you would be able to prepare meals for yourself. You may also claim ‘personal incidental costs’ for outgoings which arises as a result of living away from home, although not necessarily in the course of your work, such as laundry costs, home telephone calls and newspapers. These can be claimed to a maximum of £5 a night for overnight stays in the UK, but your costs much include VAT where applicable and you will need receipts to prove your expenditure.
  • Protective clothing, tools and equipment – an employee is not normally able to claim the cost of work clothing, unless they are required to wear special protective or safety clothing such as helmets, gloves, overalls or boots. Any costs associated with cleaning or maintaining such equipment can be claimed, although the initial purchase costs cannot be deducted. You can, however, claim the costs of purchasing and maintaining any equipment you need to perform your job, so long as you have evidence that such tools are absolutely necessary for your current assignment.
  • Professional Subscriptions – if you are a member of a recognised professional body or society, then you may be able to claim the costs back if it is relevant to your current assignment. You can find a list of approved bodies here: www.hmrc.gov.uk/list3/index.htm.
  • Insurance – if the contract for your assignment requires you to have professional indemnity insurance, then you can claim the costs back as an expense.
  • Working from home– if the terms of your assignment require you to work from home for some or part of the time, then you might be able to claim some of your household costs as expenses. This could include the additional costs of heating and lighting in your work area, business phone calls etc. You cannot claim relief on mortgage repayments, council tax, phone line rental or internet access, but you can claim £4 per week or £18 per month for household expenses without requiring receipts or proof of your outgoings.
  • Pension contributions- if you wish to, you can pay some of your income into a pension scheme which will be classed as a tax benefit, and the sum invested will not be subject to either employees’ or employers’ National Insurance.
  • Childcare vouchers – working parents are able to exchange up to £55 a week or £243 a month for childcare vouchers, and the sums exchanged are not subject to National Insurance or income tax. This can represent a saving of up to £2,392 per year for parents who put it towards childcare costs.
  • Charitable Donations– many people use payroll giving to allow workers to donate money to a UK charity, with the tax deducted at source and the money going directly to a good cause.

Things to remember about expenses

Claiming legitimate expenses is allowed under HMRC regulations, but any deductions for money that you have not spent or costs you have not incurred would be considered tax evasion by HMRC. You should make sure you keep receipts for any expenses you wish to claim and if you have any questions, then your umbrella company should be able to offer you advice and help you to ensure that you are doing everything according to HMRC guidelines.

If you have any concerns about whether you would be better off working for an umbrella company or setting up your own business to administer your contracts, then our experienced accountants are able to offer you advice and information to help you manage your finances. Having a dedicated accountant can save you time and money which will allow you to focus on your work, so give us a call today on 01253 362062, email us on newbusiness@nixonwilliams.com or fill out our online application form.