Understanding what expenses are allowable by the Inland Revenue can be confusing and frustrating. Mistakes calculating taxes can be costly, with fees and fines costing as much as the back tax owed, not to mention the possibility of time in prison if you are found guilty of tax evasion!
Fortunately, working with an umbrella company can relieve the freelance contractor of those headaches by absorbing the paperwork and the responsibility for compliance. You simply hand over your paperwork and receipts; the company does the rest, leaving you assured that you won't run afoul of compliance regulations. Using an umbrella company allows you to maximize your allowable expenses while ensuring compliance. By filtering claims, the company helps protect clients from tax evasion accusations.
Claims must be supported with receipts, and should be incurred wholly, exclusively and necessarily in performing the duties of the particular job. Allowable claims include meals (but only in certain circumstances), necessary travel, and other incidentals. In general, there are two types of claims. Chargeable claims are items or expenses that the company has agreed ahead of time to reimburse. Often, chargeable expenses are handled through an accounts department.
Like chargeable claims, non-chargeable expense claims require receipts, but instead of being directly reimbursed, non-chargeable expenses are used to reduce your tax liability. It is important to keep receipts to back up non-chargeable claims for six years, the limit on potential audits by HMRC.
Non-chargeable claims are not inexhaustible. The circumstances of a job including claimable expenses are quite specific. First, the job must not last for more than two years for the job site to be considered temporary. From the time you are aware that the contract will extend beyond 24 months, claims are no longer allowable. It is important to understand the claiming rules, so that you remain compliant. Moving sites won't extend the time in which claims may be filed. Nor will creating a new contract with the client.
Travel to and from a temporary work site is claimable, to cover the costs of fuel, maintenance and insurance cover. If your client allows mileage as a claimable expense but doesn't meet the allowable limit of 40p per mile, you can claim the difference. Car hire or public transportation is claimable as well, but you must have a valid receipt for tickets.
Meals and the cost of a hotel or other rented accommodation are claimable as well, as long as the rental you are paying is in addition to your primary residence. Clothing is only claimable if it is considered protective in nature or is a uniform required by your contract. Professional subscriptions, insurance cover and certain medical expenses, like eye tests and the cost of contact lenses or glasses, may be claimable, if they are related directly to the job. Charitable contributions and pension contributions may also be claimable expenses, and are processed automatically as a tax benefit. Using an umbrella company saves businesses the time and trouble of keeping track of the complex compliance regulations and protects workers and companies from liability, making outsourcing payroll a sensible business decision.