Claiming expenses can be an exacting and time-consuming process for contractors. For many, choosing to create an umbrella company can make the process straightforward, provided you know what you are doing.
So, how exactly does forming an umbrella company help when it comes to managing your expenses and what should you bear in mind when using one?
How does being an umbrella company affect your expenses?
Simply put, operating as part of an umbrella company allows a greater degree of control and flexibility when it comes to calculating your final tax bill – making mission critical purchases more affordable and ensuring that you end up paying the correct amount of tax at the end of the year.
Before April 2016, being part of a company gave a wide range of scope when it came to claiming items for expenses, with options including phones, clothing, training and more. Recent HMRC changes to the sector have actively clamped down on this, aiming to target individuals that are full-time employees in all but name.
What is SDC?
When it comes to determining the status of an umbrella employee, the government uses the acronym SDC – or, supervision, direction, and control. This breaks down into:
Supervision: Is the way in which the individual provides their services and the degree of oversight and accountability they experience.
Direction: Is the way in which the professional carries out their work and whether they are being directly told what to do and how to do it.
Control: Is how much say does the individual have over the completion of the work and whether they have a high degree of autonomy or are they following prescriptive in-house rules to the letter.
Ultimately, this can severely limit your ability to claim back expenses or use an umbrella company as your framework of choice. And this renewed degree of scrutiny makes it essential to understand your position and the letter of the law when it comes to making claims.
What can I claim?
If you are an eligible claimant, the current process for claiming your expenses is relatively straightforward. While technically anything can be expensed, only legitimate business costs will be considered.
These are bracketed into-
Client Billable Expenses: These are agreed up front at the start of the project and fully cleared through the relevant agencies. Often billed in advance, these are tracked in any reliable piece of software but do not factor into HMRC contributions.
Business Cost Expenses: These are essential expenses that allow you to complete your tasks and are NIC and Tax free. This ranges from electronic equipment such as tablets and laptops, parking fees, any professional materials or literature needed. These all require receipts to claim successfully and should potentially be cleared with your accountant before enacted.
Travel: Any mileage to and from your site can be claimed. This will vary from vehicle to vehicle (with the field split into cars and vans, motorbikes, and bicycles), with the cost changing after the first 10k for cars and vans but remaining the same for other modes of transport.
Business Expenses: A varied category, this includes essentials such as office supplies, gear, basic subsistence, and business travel. These can be applied for through HMRC and should be validated in advance with your accountant or a relevant professional before making a claim.
A further wrinkle may be caused by IR35 changes if you are working as part of a limited company. Given how much discussion has sprung out of the legislation, it is worth keeping up to date with changes and making sure you and your company are fully compliant.
If you are struggling with finding the right setup or system to manage your expenses and reporting, our team at One Click Group is here to help. With many years’ professional experience providing care for umbrella contractors in a range of sectors, we understand the importance of providing the bespoke service that your business needs.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.