Personal expenses for employees
It is important that all employees understand the basis on which personal expenses are paid.
Firstly, all expenses must be bona fide expenses permitted by HMRC.
As explained elsewhere, all expenses are paid out of the ring-fenced fund created for each employee from the fees that he or she earns on assignment. After paying expenses, the remaining funds are used to pay salary and the costs of employment (Employer’s NI, etc). If expenses increase, then salary reduces, and vice versa. However, it is obviously more tax efficient to use available funds first to draw expenses which are untaxed, and then to pay salary which is taxed.
Claiming expenses – the mechanics
As in any company scenario, particularly in the professional field, there is a distinction between the fees and expenses that a company charges to its clients, and the salary and expenses that a company pays to its employees.
The employee (contractor) negotiates the fee with the end-client, on behalf of Competex Pro, 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 end-client is concerned, the agreement with the end-client as to what expenses may be charged is also negotiated in advance by the employee, again acting on behalf of Competex Pro. Having negotiated what may be charged, the normal arrangement then is to use the end-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 claimed are then usually emailed by the employee to Competex Pro as soon as they are available, so that we may charge the end-client and the end-client may then pay us (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 end-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 Competex Pro using a suitable 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
Many of the larger agencies have well developed systems whereby they ‘automatically’ charge end-clients agreed fees and expenses based on the timesheets that you complete. Often these agencies will then ‘self-bill’ Competex Pro (i.e. create an invoice from Competex Pro to themselves) and then email this to us followed by payment within a few days.
Each agency operates a slightly different system, and you will need to follow their guidance.
Travel and subsistence expenses
Under the Off Payroll Working rules, if you are working under an IR35 contract, or if you are working under the ‘supervision, direction and control’ of your end-client (see IR35 Explained), you are not permitted to receive travel expenses free of tax in respect of travel to and from your end-client (i.e. commuting expenses). However, if exceptionally you travel to a location that is not your normal end-client workplace, say to attend a one-off business meeting at a site you don’t usually visit, you may receive payment of these expenses free of tax.
If you are working under IR35, you may still negotiate for Competex Pro to charge the end-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 client, and that the assignment will not last for more than 24 months, and if the end-client accepts this, then you may be paid travel expenses without deduction of tax.
Travel and subsistence includes:
- Train and bus fares
- Congestion charges
- Car hire
- Rented accommodation
- Air fares
Charging travel expenses to and from home
If your client is in agreement, there is no reason why you should not agree for Competex Pro 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 National Insurance. 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
Other expenses you may claim from Competex Pro, and payable free of tax and NI include:
- Personal pension contributions (paid directly to a pension provider)
- Professional memberships
- Certain training courses relating to your current work
- Eyesight tests
- Itemised telephone calls
All these expenses must be supported by relevant receipts.
All expenses, including any amount to be paid directly to a pension provider, are normally paid at the time of paying you. Your fund would need to be sufficient to cover these expenses after paying your basic salary at National Minimum Wage and holiday pay. 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 should be made directly to Competex Pro and, except for scale rate subsistence claims, should be supported by relevant receipts. However, please be aware that Competex Pro 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
Competex Pro will pay the cost of hotel accommodation, and the reasonable cost of meals taken while you are staying away from home, but you must be able to illustrate that you were travelling on business away from your normal place of work.
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.
Competex Pro 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 (e.g. the weekend or holidays) you may claim the cost of rental only for the days when you are working.
If you choose to stay with friends or family, you may pay for and claim the cost of the accommodation but you 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 of £7,500.
HMRC allow you to claim for reasonable subsistence, provided you retain receipts to support any claims.
Alternatively, if you have not retained the receipts, you may claim HMRC scale rates as set out below. HMRC scale rates are based entirely on journey time and are as follows:
- Journey time of 5 hours – £5
- Journey time of 10 hours – £10
- Journey time of 15 hours (and continuing beyond 8pm) – £25
The normal rules for mileage apply to Competex Pro employees.
When you negotiate for the end-client to pay expenses, you may sometimes agree a mileage rate of either more or less than the HMRC-approved rate, or you may also arrange for the end-client to pay the same rate all through the year regardless of when you reach the threshold (see page 21). However, in such cases you will need to restrict your own claim from Competex Pro to 25p per mile when you reach the threshold, at which point any excess above 25p per mile paid by the end-client will go into your ‘fund’ and be paid to you after tax and NI.
If your end-client is paying less than the HMRC approved mileage rate, you may claim from Competex Pro 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 limited company and through Competex Pro, you may claim the higher rate (45p per mile) for the first 10,000 travelled for each company.
Use of mobile phones and other telephone costs
The expense of using a mobile phone may be claimed only if the contract is in the name of a company and if the expense is included in the accounts of that company.
Since your mobile phone contract will not be in the name of Competex Pro, the only way to claim from Competex Pro 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 Competex Pro
As an employee of Competex Pro, certain expenses that were permitted for your limited company are no longer permitted as personal expenses:
- Using your home as your office
- Accountancy fees
- Bank charges
- Insurances relating to your limited company
- Mobile phone – see above
VAT on expenses
When claiming expenses from the end-client on behalf of Competex Pro, you should itemise expenses net of VAT and then charge VAT on the total, as in the eyes of HMRC we are providing a service and all fees and expenses must bear VAT. Importantly, one should not charge VAT on top of an expense that already includes VAT.
When claiming expenses from Competex Pro 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.
As an employee of Competex Pro, you are covered by the following insurances:
- Professional Indemnity – limit £1,500,000 (excess £1,500)
- Employer’s Liability – limit £10,000,000
- Public Liability – limit £10,000,000
You are therefore not required to arrange your own insurance for assignments through Competex Pro. However, you should continue to arrange your own insurance for any work that you do through your own limited company, if applicable.
In the unlikely event of a claim on the PI insurance, Competex Pro would recover the excess charge from the employee’s fund. However, let it be said that over a period of 20 years Competex has not been aware of any PI claim ever being brought upon any of their clients!
If you have an insurance requirement in addition to the above, this can be accommodated at your own cost.
VAT on Competex Pro invoices
Continued use of your limited company
You may continue to use your limited company while working through Competex Pro, but you should be careful about the allocation of expenses.
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 Competex Pro may be charged only to Competex Pro, and expenses relating to your work through your limited company may be charged only to your limited company.
The following gives an indication of the type of expenses you may continue to put through your limited company:
- Travel – this must relate to the work of your limited company and could for instance relate to interviews for future work
- Mobile phone charges
- Charitable donations
Be aware that you would benefit from charging such expenses to your limited company only if your limited company 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 limited company as and when it becomes active again.