How do umbrella company expenses work?
A business expense is a cost that has been incurred wholly and exclusively for business purposes, and if claimed as an expense you will not pay tax on the cost.
As a contractor working through an umbrella company, you will have chargeable and non-chargeable expenses. Chargeable expenses are costs that your end client has agreed to reimburse to you. Whereas non-chargeable expenses are costs that your end client will not reimburse but can be claimed as tax-deductible expenses through your umbrella company. But what is classed as a valid business expense?
What costs can I claim as an expense?
Below are some examples of costs that could be classed as expenses if they are incurred wholly and exclusively for business purposes.
Special Note: In the March 2015 budget the government announced plans to clamp down on travel and subsistence expenses. For more information on these proposed changes, please visit the following page: Changes to travel and subsistence expenses.
The information outlined below is intended as a guide only and we always recommend speaking to your accountant for specific information based on your circumstances.
Travel that has been incurred solely for business purposes can be claimed as a business expense. If you were to travel by public transport you can expense the cost of your ticket and if you travel in your own vehicle you can claim a rate per mile to cover fuel and any wear and tear on your vehicle. You are also able to claim for parking and congestion charges.
Accommodation and meal allowances
Reasonable hotel costs can be claimed as a business expense on occasions where you are required to stay away from your home overnight for work purposes. In this situation you would also be able to claim reasonable meal costs as a business expense, but only if you are staying away from home, not on a regular working day.
If your work or business requires specialist equipment or software that will be used wholly and exclusively for business purposes then the cost can be claimed as an expense.
Clothing that could be used for both business and personal use such as a business suit cannot be claimed as a business expense, because even if you only wear it for work purposes. However, if you are required to wear branded uniform or protective clothing for work, this would be an exception because the cost is solely for business and so could be classed as an expense.
As long as the training course in question is wholly and exclusively for business purposes then the cost can be claimed as a business expense. An example of this would be if your client has requested that you learn a particular skill for your contract.
Do I need to keep my receipts?
You must keep receipts for all your expense claims as HM Revenue and Customs (HMRC) could ask to see proof that you have actually incurred the expense. If HMRC were to ever investigate you they can go back as far as six years and so it is recommended that you keep your receipts for this length of time.
It is important to be aware that some umbrella companies may make false expense claims on your behalf so that you pay a lower amount of tax. Remember, if you can’t prove that the cost was actually incurred HMRC will view it as tax avoidance, and it is you, not the umbrella company that will be liable.
Our recommended Umbrella Company provider Parasol provide employment services to contractors who do not want to operate through a Limited company. If you have any questions about contracting through an umbrella company or using Parasol, call 0800 634 7526 or email firstname.lastname@example.org for more information.
Depending on your contract you may find that you will benefit from operating through a Limited company. Read on for more information on contracting through a Limited company.
Limited or umbrella?
The rules for claiming expenses vary between the two and Limited company contractors are able to claim on a wider range of expenses, which is one of the ways that they are able to work more tax efficiently. To find out more about the differences between Limited and umbrella companies visit our Limited company or PAYE umbrella page for more information. You may also find our Contractors Guide to Expenses useful.
For more information about expenses or if you are considering becoming a contractor and are unsure if Limited or umbrella is right for you, then please contact a member of our new business team on 01442 275789 or email email@example.com.