This document outlines the income tax rules in respect of tax relief for employee’s expense claim(s) where individuals are employed by umbrella companies under an overarching employment contract. The scenarios and expense types outlined within the document are not exhaustive.
FCSA members should consider any expense reimbursement claims carefully, with reference to the legislation and HMRC’s guidance. Employee expenses are a key area of HMRC focus during enquiries,
particularly employees of umbrella companies. In the event of any uncertainty members should seek professional advice.
When considering the tax treatment of expenses, different rules apply depending on whether Supervision, Direction, or Control (“SDC”) applies.
The general rule underpinning expense reimbursement state a deduction from earnings is allowed for an amount if
In addition to the general rule, specific rules relating to travel expenses exist; most notably the disallowance of relief when an employee incurs an expense in relation to ordinary commuting (e.g. travel to/from home and what is considered a permanent workplace). Further details in respect of ordinary commuting are outlined below.
In April 2016, specific rules were introduced relating to employees working via intermediaries such as umbrella companies. Under these rules, the availability for income tax relief depends on whether the employee is subject to (or the right to) Supervision, Direction or Control (“SDC”) by anyone including the end-client to whom the umbrella company has supplied the employee.
The FCSA umbrella employee code stipulates that, where expenses are paid on the basis that SDC does not exist, all members obtain written confirmation from the End Client, prior to the start of the role, which confirms whether an umbrella employee is subject to SDC (or the right thereof). The FCSA also operates a code for fixed term umbrella employees. Umbrella employees covered by this code cannot claim travel expenses to their main workplace regardless of whether they are subject to SDC or not.
All members should also confirm with the end client whether the employee/role (or any other employee performing the same role) has not already been assessed as being inside of IR35 and/or the End Client is not aware of any such assessment.
Please note, the FCSA Self-employed CIS code lists certain high-risk roles where SDC is presumed to exist. As a guide, those high-risk roles should also be considered in the context of SDC checks for umbrella employees’ travel expenses.
From 1st October 2022, FCSA members must not onboard new umbrella employees into a fixed expenses model and must not offer or advertise a fixed expenses model. FCSA members who currently offer or provide fixed expenses for assignments onboarded prior to 1st October 2022 are required to wind down those operations by 1st October 2023.
SDC rules, along with the FCSA’s requirement for written confirmation from the End Client, do not affect other expenses covered by the normal expense rules (i.e., those expenses that are not home to site commuting costs and are incurred, wholly, exclusively, and necessarily in the employee’s performance of duties). For example, PPE, tools, site to site travel, accommodation and subsistence expenses are still capable of being paid tax free if they qualify under the normal expense rules subject to the necessary records and checks being maintained.
For ease, this note sets out an overview of the relevant rules for employees working under both SDC and without SDC being present.
Umbrella employees who are free from SDC (or the right thereof) as to the way in which they perform their duties are eligible for home-to-site travel and subsistence expenses.
The exception to this rule is in respect of “ordinary commuting” costs as outlined below. In most cases, umbrella employees will be engaged under a contract which requires them to work at a variety of locations such that they have no normal workplace. However, if the contractual relationship or the fact pattern shows that they are only expected to work at one location, that location will be their normal workplace and any travel and subsistence expenses taxed in accordance with the ordinary commuting rules outlined below.
Please note, there only needs to be a right of SDC by the end client over the employee for these rules to apply. It does not matter whether that right is exercised in practice.
Travel, subsistence, and accommodation costs incurred in relation to travel to the main place of work under which the client has engaged the worker are considered “ordinary commuting” expenses. As such, they are fully taxable.
This applies equally to travel, subsistence, and accommodation expenses if the employee is transferred or moved to another site under the same assignment, as each site is deemed a normal workplace for income tax purposes.
In contrast, if an employee is asked to attend another site for a couple of days, for example, but purely on a temporary basis during the engagement, then this secondary site would be considered a temporary workplace. In which case, expenses would qualify for income tax relief.
An employee is permitted to claim expenses providing their workplace meets HMRC’s definition of a temporary workplace. Defined by either of the following:
For further guidance, please refer to HMRC’s examples as follows:
Please note, the main place of work will never qualify under the temporary workplace rules even where the contract is for less than 24 months. An example of this from HMRC is available at https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32131
If an assignment is initially intended to last for less than 24 months, yet it becomes clear during the assignment that attendance at the workplace is likely to exceed 24 months, then travel and subsistence expenses will cease to be allowable from the date the circumstances change. Please refer to HMRC’s example at EIM32084.
The rules relating to “ordinary commuting” as outlined above apply equally where SDC is exercised (or the right thereof) over the employee by the end-client. As such, they are fully taxable.
However, it is still possible to pay travel and subsistence expenses to employees working under SDC and/or employees on fixed term employments if those expenses relate to a new, temporary workplace such as:
a) Site to site travel and subsistence to temporary site locations on an exceptional basis
Site to site travel and subsistence costs relating to a trip taken to a temporary site location will qualify for income tax relief, even where that trip starts and/or ends at home. Please refer to HMRC’s example at ESM5590 – Example 2.
If, however, the employee travels from home to their permanent site, then onwards to a temporary site, income tax relief will only be available between the journey from the permanent to the temporary site and back again.
b) Depot based employees
If the employee starts their working day by attending a client depot, and from there receives instructions on their work and journeys for the day, travel and subsistence expenses that are incurred from the depot may be claimed.
c) Multi-site employees
If the employee travels to multiple client sites during the day but is not required to attend a depot or base, travel and subsistence between client sites may be claimed. In this scenario, expenses cannot be claimed for the first journey of the day from home to the first client site or the last journey of the day from the final client site to home. Journeys between sites will qualify for income tax relief.
d) Employees covering a geographical area
If the employee is responsible for a geographical area, the whole area is regarded as a permanent workplace. As such, if they live outside the area, then travel to/from home to the area do not qualify for income tax relief. Income tax relief will be available for:
• Business travel within the area
• Business travel between the area and other workplaces outside the area.
Providing the relevant conditions outlined under section 3 and 4 apply, then the expenses which qualify for income tax relief are as follows:
All expense claims should be supported with evidence (e.g. receipts) and these should be kept on record. In the absence of suitable evidence, expenses should either not be reimbursed, or reimbursed and subject to income tax and NIC.
In line with current HMRC approved rates and thresholds, the following mileage rates can be claimed where the employee uses their own vehicle or a hired vehicle in a given tax year:
|Vehicle Type||First 10,000 miles||10,000+ miles|
Throughout the engagement, a record of the journey must be maintained which includes the date of the journey, the vehicle registration details, the mileage, the places visited and the reason for the visit.
All mileage claims must be verified using a postcode checker or equivalent and employees must provide VAT receipts in support of each claim made.
Record keeping is only likely to be sufficient with the input of the End Client and with regular review (as the assignment circumstances may change over time). HMRC are unlikely to accept only the employees’ statement or that of any third party not responsible for managing the employee’s journeys to and from any temporary workplace locations.
Whilst on the surface, this may seem to be a straightforward situation, the scenarios above only consider the SDC position of the employee. In addition, the normal travel expense rules should be considered and record keeping should support any position taken. These rules exist for all employees (not just umbrella employees) and come into force once the employees SDC position has been determined. For expenses to qualify as tax free, HMRC would need to be satisfied of the following:
These points will be considered by HMRC in retrospect so care needs to be taken to regularly review working patterns and claims e.g. the position might change over time if the facts used to assess the tax position on any claims are not supported by the fact pattern over the course of the employment.
The tax rules that apply to End Client billable or chargeable expenses are no different to the rules that are set out above. In other words, expenses paid or sanctioned by the end client will be taxed as though the employer paid them.
An assessment of the employees SDC status must be carried out, and End Client written confirmation obtained, prior to the start of the role, for all employees deemed to be free from SDC.
For employees who are subject to SDC, or, where an SDC status test has not been carried out (and as such the employees SDC status is unknown), only those expenses set out in section 4 can be
considered in respect of tax relief. In this scenario, the FCSA’s requirement for End Client written confirmation prior to the start of the role is not applicable. However, members should obtain clarification from the End Client as to the points set out in section 6, above. Members should also retain evidence of the End Client’s clarification and take care to ensure regular reviews of the employees work pattern are carried out.
If taxable expenses are paid or sanctioned by 3rd parties without the necessary deductions and year end reporting being made, the employer is likely to be liable for any PAYE/NIC underpayments, interest and penalties involved unless they can genuinely show that they had no knowledge or involvement in the underpayment.