Claiming expenses – the mechanics
However, at this point you will also appreciate that as far as fees charged to a client and salary paid to an employee are concerned, an umbrella company is very unusual. Firstly, the employee negotiates the fee with the client, even before he or she starts working for the company, and then almost the entire income earned by the employee is preserved in a ring-fenced ‘fund’ for the benefit of that employee and used to pay his or her salary and all other costs of that employment.
As far as claiming expenses from the client is concerned, the agreement with the client as to what expenses may be charged is also negotiated in advance by the employee, again acting on behalf of the umbrella company. Having negotiated what may be charged, the normal arrangement then is to use the client’s own expense claim form to claim agreed expenses, or to set out the expenses in a format acceptable to the client. Details of the expenses actually claimed are then emailed by the employee to CUL as soon as available, so that CUL may charge the client and the client then pay CUL (but see below if working through an agency).
As far as paying expenses to the employee is concerned, the expenses that may be paid free of tax and NI are determined entirely by HMRC regulations. In particular, it may be that the payment of certain expenses has been negotiated with the client but that these expenses may not be paid on to the employee free of tax and NI. This means simply that the ‘fund’ available to pay salary is increased.
You should claim your expenses directly from CUL using our expense claim form, and you should attach or email scanned copies of invoices or receipts as appropriate.
Claiming expenses – working through an agency or provider
Each agency operates a slightly different system, and you will need to follow their guidance.
Travel and subsistence expenses
If you are working under IR35, you may still negotiate for CUL to charge the client for regular travel expenses, but these will be taxed in the same way as and together with the rest of your salary. Alternatively, of course, you may be able to increase your daily rate to compensate for not claiming expenses.
On the other hand, if you can demonstrate that your assignment does not come under IR35, that you are not working under the supervision, direction and control of your end-client, and that the assignment will not last for more than 24 months, and if the client accepts this, then you may be paid travel expenses without deduction of tax.
Charging travel expenses to and from home
However, if your client is agreeable, there is no reason why you should not agree for CUL to charge for daily travel (and/or any other expenses that they are prepared to pay) in addition to daily fees, but HMRC do not permit these expenses to be paid to you free of tax and NI. Receiving payment for such expenses will increase the size of your ‘fund’, and therefore the amount available to pay you as salary.
Charging travel expenses for exceptional journeys
CUL may charge the client for the cost of travel to and from any other location that you need to visit on an exceptional basis, and these expenses may be paid to you free of tax and NI out of your ‘fund’, whether or not your client has agreed to pay CUL. These claims should relate to actual journeys from either your home or from your client’s workplace, depending on your start point.
Items paid directly to providers:
- Personal pension contributions;
- Child Care vouchers.
Other expenses supported by relevant receipts and paid directly to the employee:
- Professional memberships;
- Certain training courses relating to your current work;
- Eyesight tests;
- Itemised telephone calls.
All expenses, including any amount to be paid directly to a provider, are normally paid at the time of paying the employee. Your fund would need to be sufficient to cover these expenses as well as paying your basic salary and holiday pay at National Minimum Wage, which takes priority. Therefore, a certain amount of planning may be required and appropriate arrangements would need to be made with the provider, particularly in the case of pension contributions.
All claims for expenses other than travel and subsistence should be made directly to CUL and should be supported by relevant receipts. However, please be aware that CUL has a responsibility to ensure that all expenses that are incurred are wholly, exclusively and necessarily for the business (i.e. they must be both reasonable and genuine).
Staying away from home on an irregular basis
You may also claim a nightly allowance to cover the cost of personal incidental expenses while you are staying away from home overnight on business. The scale allowance set by HMRC is £5 per night spent away from home in the UK or £10 per night spent outside the UK. This is intended to cover items of a personal nature such as newspapers, laundry and telephone calls home, but if you have been charged for these things on your hotel bill, you should not also claim the scale allowance.
CUL will pay the cost of staying in rented accommodation provided you always return home on days when you are not working. If you choose to stay in the rented accommodation on days when you are not working (eg the weekend or holidays) you may claim the cost of rental only for the days when you are working.
If you chose to stay with friends or family, you may pay for the accommodation but must obtain a receipt for the payment, on the basis that the recipient would include the income in his/her tax free ‘Rent a Room’ allowance.
However, subsistence may be claimed only where all the following qualifying conditions are met:
- The travel must be in the performance of your duties, away from both your home and your normal place of work;
- You must have incurred the cost of the meals after starting the journey.
- The cost of breakfast (or the scale rate allowance) may be claimed where you leave home earlier than usual and before 6.00am, and the meal is taken away from home after the qualifying journey has started. However, if you regularly leave home before 6.00am, then the breakfast allowance is not available.
- The cost of a single meal (or the scale rate allowance) may be claimed where you have been undertaking qualifying travel for a continuous period of at least 5 hours and have incurred the cost of a meal.
- The cost of two meals (or the scale rate allowance) may be claimed where you have been undertaking qualifying travel for a continuous period of at least 10 hours and have incurred the cost of one or more meals.
- The cost of a late evening meal (or the scale rate allowance) may be claimed where you have had to work later than usual, have finished work after 8.00pm having worked your normal day, and have bought a meal before the qualifying journey ended. However, if you regularly arrive home after 8.00pm, then the evening meal allowance is not available.
HMRC scale rate allowances for subsistence are as follows:
- Breakfast allowance – £5
- Single meal allowance (away 5 hours +) – £5
- Two meal allowance (away 10 hours +) – £10
- Late evening meal allowance – £15
The breakfast and late evening meal allowances are for use only in exceptional circumstances and are not intended for employees with regular early or late work patterns. Subsistence payments are limited to three meals on any one day or 24 hour period. However, where an employee is required to start early or finish late on a regular basis, the single meal and two meal allowances may be paid provided that all the other qualifying rules are satisfied.
When you negotiate for the client to pay expenses, you may sometimes agree a mileage rate of either more or less than the HMRC approved rate. You may also arrange for clients to pay the same rate all through the year regardless of when you reach the threshold (see below).
However, you will need to restrict your own claim from CUL to 25p per mile when you reach the threshold, at which point any excess above 25p per mile will go into your ‘fund’ and be paid to you after tax and NI.
If your client is paying less than the HMRC approved mileage rate, you may claim from CUL the full approved mileage rate for travel to and from other locations that you need to visit on an exceptional basis.[The annual mileage threshold of 10,000 miles in the tax year relates to each employment, as long as the employments are not related and, therefore, if you are working on different assignments through both your PSC and through CUL, you may claim the higher rate for the first 10,000 travelled for each company.]
Use of mobile phones and other telephone costs
Since your mobile phone contract will not be in the name of CUL, the only way to claim from CUL the cost of telephone calls is to provide phone bills and itemise the calls. For this reason it may be impractical to claim for the cost of telephone bills.
Non-allowable expenses as an employee of CUL
- Using your home as your office
- Accountancy fees
- Bank charges
- Insurances relating to your PSC
- Mobile phone – see above
VAT on expenses
When claiming expenses from CUL as an employee, the arrangement is different. Here you should itemise all expenses including VAT where applicable, and show any VAT only where it is included. Many expense claim forms guide you through which expense items include VAT and which do not.[When working through your PSC and registered under the VAT flat rate system, you may previously have had technical issues when recharging expenses to clients because you could not reclaim VAT on these items. This issue does not arise when working through CUL.]
- Professional indemnity – limit £1,500,000 (excess £1,500*)
- Employers liability – limit £5,000,000
You are therefore not required to arrange your own insurance for assignments through CUL. However, you should continue to arrange your own insurance for any work that you do through your own PSC.
(*In the unlikely event of a claim on the PI insurance, CUL would wish to recover the excess charge from the employee’s fund. However, let it be said that over a period of 20 years Competex Ltd has not been aware of any PI claim ever being brought upon any of their clients!).
VAT on CUL invoices
For the sake of clarity, CUL charges VAT on the invoices rendered to your client and accounts for this to HMRC.
Continued use of your personal service company
Expenses may be charged to a company and paid free of tax and NI to an employee only if they have been incurred wholly, exclusively and necessarily in the running of the business. This means that expenses relating to your work through CUL may be charged only to CUL, and expenses relating to your work through your PSC may be charged only to your PSC.
The following gives an indication of the type of expenses you may continue to put through your PSC:
- Travel – this must relate to the work of your PSC and could for instance relate to interviews for future work;
- Mobile phone charges;
- Charitable donations;
- If you also engage in coaching, even if you are not paid, you may do this in the name of your PSC and charge any relevant expense to your PSC.
Be aware that you would benefit from charging such expenses to your PSC only if your PSC has retained disposable income or if there was the prospect of acquiring disposable income at some time in the future. However, to avoid increased accounting charges, you may prefer to keep a separate record of these expenses and charge them to your PSC as and when it becomes active again.