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The whole area of contractor claimed direct expenses has changed beyond recognition following a series of changes across recent years.

The first major change to expenses came within the Finance Act of 2015 which removed the need for dispensations and placed the obligation on employers to assess expenses correctly. Where they failed in this duty it was the employer that held any liabilities arising.

The act also included various test of being classed as an employer with the one affecting umbrella providers being the 'Relevant Salary Sacrifice' test. The key points of note are:

289A Exemption for paid or reimbursed expenses

(1) No liability to income tax arises by virtue of Chapter 3 of Part 3 (taxable benefits: expenses payments) in respect of an amount (“amount A”) paid or reimbursed by a person to an employee (whether or not an employee of the person) in respect of expenses if—

(a) an amount equal to or exceeding amount A would (ignoring this section) be allowed as a deduction from the employee’s earnings under Chapter 2 or 5 of Part 5 in respect of the expenses, and

(b) the payment or reimbursement is not provided pursuant to relevant salary sacrifice arrangements.

It is point (b) that provides the first reference to 'relevant salary sacrifice. This point is repeated throughout the new rules.

Relevant salary sacrifice is defined:

(5) “Relevant salary sacrifice arrangements”, in relation to an employee to whom an amount is paid or reimbursed in respect of expenses, means arrangements (whenever made, whether before or after the employment began) under which—

(a) the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement,


(b) the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement.

The structure of some umbrella contracts would catch them under point (a) however if they were able to argue this point (b) becomes the slam dunk.

Whilst on paper there are ways to work around this, and we had these signed off by HMRC, the reality is that the complexity of the work-arounds means that they lead to confusion and misunderstandings and so suit very few workers.

So, the net result is that the old expenses regime ended and the new tests applied.

The major expense category that fell outside the legislation was mileage expenses. This would allow umbrella providers to operate reimbursement of allowable mileage expenses from their general earnings and, where we say mileage, we mean mileage and not travel.

These rules came in to effect in April 2016.

As if that was not enough the following year, Finance Act 2016, contained further changes which most will now recognise as the test for Supervision, Direction, Control.

The effect of this test was to effectively treat every assignment as a separate employment for tax purposes and neutralise the overarching employment contract. This resulted in all single site workers who were under SDC unable to claim any expenses as their workplace was now 'permanent'.

Multi-site workers could still possibly have the right of some claims but as highlighted above this would be for mileage expenses only.

This legislation also came into effect in April 2016, so the 2016/17 so a double whammy for the sector.

In both cases any incorrect application of the rules resulted in the provider holding liabilities and these could be passed to the directors personally.

The Finance Act of 2017 saw a further change with the introduction of the Optional Remuneration Arrangements [OpRA]. This broadened the impact of the previous relevant salary sacrifice test and further limiting the payment of expenses.

Extremely specific contractual wording is required in the umbrella providers contract of employment to fall outside the OpRA test and where this is not present the provider will be unable to reimburse any expenses, including mileage.

As a result of these changes the umbrella providers expense claim forms changed and contractors are now required to provide much more information on the claims to allow the providers to meet their obligations and demonstrate to HMRC, where required to do so, that they have correctly assessed the workplace status and applied the rules correctly.

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