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What expenses can be claimed

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Using the services of an umbrella company allows you to claim expenses that a PAYE employee at the agency would not be entitled to.

This is due to the over-arching employment contract with your umbrella company that deems your home to be your permanent work place and the client's place of work your temporary work place.

You are therefore able to claim travel expenses to and from your temporary work place. By claiming all the appropriate allowances and exemptions you can minimise your tax bill however, this is not a way of avoiding paying tax. The rule for claiming expenses is "that an employee or office holder may deduct expenses incurred wholly, exclusively and necessarily in performing their duties", you must be able to prove that the expenses you claim relate to your current contract.

There are two types of expenses - chargeable and non-chargeable. Chargeable expenses are any costs that the agency/client has agreed to reimburse to you. Chargeable expenses will usually be invoiced through your Umbrella Company and will require an expense form, signed by the client, to support the claim. Non-chargeable expenses are the 'out-of-pocket' costs that you have incurred as a direct result of the contract. These costs will need to be submitted on an expense claim form to your Umbrella Company so they can be processed as a tax benefit when you are paid.

How Do Expenses Work?

Your non-chargeable expenses are processed as a tax benefit and help reduce your tax liability. As an example, if you have £1000.00 gross and £200.00 expenses, your taxable income would be £800.00. You do not receive the full value of your non-chargeable expenses back as many first time contractors believe.

They are offset against your taxable pay and you receive part of the cost back, according to the tax rate applied to your income. As a rough guide for every £100 of non-chargeable expenses claimed though the umbrella company £40 will be paid to the contractor in tax savings. Your chargeable expenses are added to your invoice value and are reimbursed by your agency who in turn bill the end client. You therefore receive the full value of the expense back.

Brief Summary of Allowable Expenses

Travel
Secondary accommodation costs
Additional meal costs
Personal Incidental Expenses (PIEs)
Protective Clothing
Training
Eye Tests
Professional Subscriptions
Equipment
Insurances
Working from home
Pension Contributions
Charitable donations


Do I Need Receipts?

As mentioned previously, it is incredibly important that you retain receipts for everything that you claim. If HMRC decide to investigate you, they would want to see evidence that you have incurred the costs that you have claimed.

How Long Do I Need to Keep Receipts?

The HMRC investigation window is 5 years so your accounts could be looked into at any point within this timeframe. You must therefore keep all relevant paperwork safe for at least 5 years after the 31st January deadline of the tax year in question.

What Happens if I Don't Have Receipts?

If you are investigated and you do not have receipts to support your claims, you will find yourself in a lot of trouble. You would be made to pay back any underpaid tax, a fine of similar value and interest for the time you have held onto the additional funds. Worst-case scenario - you could be prosecuted for tax evasion!

When Can't I Claim Expenses?

A workplace is deemed as a temporary site providing your attendance lasts no longer than 24 months. After 24 months a workplace is viewed more as a permanent site, and if you spend 40% or more of your time at the same site, you are no longer able to claim travel between home and that place or accommodation expenses.

If you have secured a contract between two permanent roles i.e. a permanent role has already been sourced or the contract is a secondary income, expense claims for travel and subsistence are not permitted. Travel and subsistence claims are only permitted when you are working at a temporary location; a single contract, however short term, would be classified as a permanent location.

What Expenses Can I Claim?

  • Travel
    You can claim the cost of travel to and from your temporary place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal tax year (For example 6th April 2011 to April 5th 2012) and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle e.g. road tax, insurance, servicing and depreciation, therefore additional claims for maintenance, repair and loan interest are not permitted.
    If you are charging mileage to the agency/client, you can also claim the difference between the agreed amount and the 45p per mile allowance. For example if you are charging 25p per mile you can also claim 15p per mile as non-chargeable mileage. If you are travelling to work as a passenger in a car you are entitled to claim 5p per mile. You can also claim for parking, toll and congestion charges but you may not claim for parking or speeding fines. The cost of travel by public transport can be claimed but you must have a valid receipt or ticket. If you choose to pay extra and travel by first class, you can still claim the full cost of the ticket. A mileage allowance can also be claimed for travel by motorcycle and bicycle at rates of 24p per mile and 20p per mile respectively. The cost of car hire can be claimed as an expense, as well as the mileage covered in it. You would however need to keep all the relevant paperwork to prove the cost was incurred should it be required. Travel to an interview cannot be claimed. The contract must have been secured and started for you to be able to begin claiming expenses. If, however, the contract stipulates that you must attend a training course before the start of the contract, you could claim your travel costs.
  • Secondary Accommodation Costs
    The receipted cost of hotel or bed and breakfast accommodation can be claimed as an expense, if you are living too far away from the client site to travel from home each day. In the same way as first class travel, if you choose to stay in 5 star accommodation, you can still claim the full cost of the bill.
    If you are renting a secondary property, so you are closer to the client's site, you can claim the rental costs as an expense. If you are renting out your primary residence whilst on contract, the rented property isn't a secondary cost and therefore can't be claimed as an expense. You can also claim secondary utility bills from the rented property. The council tax bill, for example is classed as a secondary cost because you would have to pay this on both properties. Your electricity/gas/water bill would only be classed as a secondary cost if your family remains in your primary residence whilst you are staying in the rented property. If your primary residence remains empty whilst you are in the rented property, your gas/electricity/water costs from the rented property wouldn't be classed as secondary costs. Other utility bills such as television license, contents insurance etc cannot be claimed as an expense because it would be your personal choice to spend out on these items. Reasonable contributions for staying with friends or family can be claimed; you can claim £25 per night as a friends and family allowance. You will need to provide your Umbrella Company with the name, address and telephone number of the place where you stayed and the relevant date. You would however be expected to prove you have actually incurred these costs so it is advisable to ask for receipts. Please be aware that your friends or family could potentially be liable for tax on these contributions if HMRC investigate your accounts.
  • Additional meal costs
    The reasonable cost of additional meals incurred in conjunction with an overnight stay at a hotel or B&B bill can be claimed as an expense. If breakfast and/or dinner is not included on the accommodation bill, you can claim the receipted costs for these meals. Meal Costs not relating to an overnight stay at a temporary workplace is not allowable as a tax deductible expense. The 'duality of purpose' argument here is that you are expected to 'eat to live' and not 'eat to work'. These are the accepted amounts HMRC will accept for meal costs during an over night stay:

    • Up to £5 per day if you work more than 5 but less than 7 hours per day (excluding travel time and lunch breaks)


    Up to £9.50 per day if you work more than 7 but less than 10 hours per day (including travel time and excluding lunch breaks)


    Up to £15 per day if you work more than 10 hours per day (including travel time and excluding lunch breaks)

    Receipts for subsistence do need to be kept to support your claim. Please note that you can only claim the exact amount that you have actually incurred on your meal costs, not a round sum of £5, £9.50 or £15 per day. If you are working extended hours e.g. you are contracted for 8 hours per day and circumstances mean that you work for 12 hours, it would not be unreasonable to claim the cost of an evening meal as an expense. However, if you are contracted to work 12 hours per day and work only those hours the cost of meals would not be allowable. If you are staying in rented accommodation, you cannot claim for meal costs. It is HMRC's belief that you can shop, prepare and cook your meal as though you were at home - these are therefore not additional costs and can't be claimed. Entertainment costs cannot be claimed for taking clients or potential clients out to dinner.

    • Personal Incidental Expenses (PIEs)
      You are entitled to claim £5.00 for each night spent away from home during the course of the contract e.g. the cost of a morning newspaper or telephone calls home. £10.00 per night can be claimed if you are working overseas. We would still recommend keeping receipts for PIEs just to be safe.

    • Protective Clothing
      The cost of protective clothing that is worn to protect your everyday clothes can be claimed as an expense. Clothing required for the performance of your contract, that could not reasonably worn outside of work can also be claimed. You cannot claim for ordinary clothing which would form part of an 'every day' wardrobe even if you would not be likely to wear your working clothes anywhere other than at work. You also cannot claim for the costs dry-cleaning or alterations.
  • Training
    According to Inland Revenue legislation an expense cannot be deducted under the general rule for employees' expenses in Section 336 ITEPA 2003 unless it is incurred "in the performance of the duties of the office or employment". This means that the training course must be wholly and totally relevant to the performance of your duties under your existing contract.

  • Eye Tests
    If you are required to use a computer as part of your everyday duties you can claim the cost of an eye test. If it can be proven that you also will need glasses or contact lenses purely for the work undertaken at the computer then this cost can also be claimed.

  • Professional Subscriptions Subscriptions to professional and trade associations are allowable as a business expense where the membership to such bodies is relevant to the duties of the employment and where HMRC recognise such subscriptions as being income tax deductible. Further information can be found on the HMRC website.
  • Equipment
    Claims for equipment must be supported by evidence that they are specifically required for your current contract and that the equipment is wholly necessary for you to perform the assignment. Any general pieces of equipment for your role as a contractor or 'nice to haves' are not permitted by HMRC.

  • Insurances
    If you are required to hold Professional Indemnity insurance for your contract, you can claim the cost for cover as an expense.

  • Working from home
    You can claim £3 per week working from home this is to cover the cost of Heating, lighting, internet usage etc. No receipts are required.

  • Pension Contributions
    Pensions are big news as they represent one of the few remaining tax breaks available to contractors. You can invest part of your income into our pension scheme and we process this as a tax benefit for you. You save not only the income tax that would ordinarily be payable but due to the pension contribution, your employers and employees national insurance contributions are lower than they would have been. The amount of tax relief can be as much as 48% meaning that for each £100 invested you pay £52 and the tax man pays the rest. For further information on pensions visit Financial Resources.

  • Charitable Donations
    Payroll giving is a scheme that allows you to make a flexible donation to any UK charity from your gross salary. This means you get immediate tax relief on your donation whilst contributing to a good cause.

  • Umbrella Company Fees
    These will usually be processed as a tax benefit automatically so you do not need to claim these.


Summary

It is important to remember that claiming for expenses that you have not incurred would be viewed by the Inland Revenue as tax evasion. Please remember that expenses are not a way to avoid tax and everything you claim must be supported by receipts. If you are unsure if an expense is allowable check with your umbrella company.

Further reading

Can I claim expenses from a previous tax year?
Contractors beware - not all umbrella companies are the same!

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