This is an area that is causing confusion.
Just because an agency allows some 'expenses' to be recharged to them it does not automatically follow that these can be paid by the umbrella company to a worker tax free.
If we first look at the contractual relationships, the contractor has no legal relationship with the recruitment company and therefore when submitting the claim they are doing this on behalf of the provider who does have a contractual relationship with the recruitment company.
This means that the contractor will also need to submit a separate claim to the umbrella in their capacity as an employee. Whilst this claim may be similar to that made on behalf of the umbrella to the recruitment company it is likely to require more detailed information.
The umbrella will need enough information on the expense form to demonstrate that the expense was incurred wholly, necessarily, and exclusively for business and relates to a temporary place of work. Where that is the case allowable expenses can be reimbursed tax free.
The recruitment company in paying the expenses claim is making no more than a contractual check to ensure the claim aligns to the contractual conditions, these rarely align to tax legislation.
Where the funds received are 'additional funds', over and above the 'general earnings', the relevant salary sacrifice test, introduced in The Finance Act of 2015 is not triggered. For this reason any category of allowable expense can be reimbursed where it is allowable and being paid from additional income.
The key point to consider is whether the expenses would have been an allowable expense.
An agency rechargeable expense is no more than additional monies received by an umbrella. The word expense is not reference to the expense being tax deductible.
In all cases umbrella providers must have a fully completed expense claim form for any expenses the worker wishes to claim. This must have enough detail to allow the provider to demonstrate that the expense is allowable.
To allow expenses against these sums the following must apply:
- The worker must complete an expense claim form to the umbrella.
The umbrella is the employer and they hold the responsibility for applying the expenses rules, and liabilities where they get this wrong. Recruiters can agree with providers how they can handle this to help simplify the process for the worker, for example using a provider's expense claim form.
- No expense claim form from the worker will mean that HMRC will disallow the expense and raise an additional tax assessment.
This would be a pure cost to the umbrella and likely to exceed any margin charged to the worker.
- Receipts must be attached as proof of the expenditure.
Copies would be acceptable as often clients require the originals, but proof of expenditure is a key part of the test.
- Expenses incurred must be wholly, necessarily, and exclusively for business.
The detail on the expense claim form should support this.
- The umbrella must be able to demonstrate that the expenses are allowable, which includes showing that they related to a temporary workplace.
As above the detail on the expense claim form will support this.
- Being unable to demonstrable why the expense was allowable will also mean that HMRC are likely to disallow the expense and raise an additional tax assessment.
- Allowable expenses can be reimbursed up to the level of additional funds received, never more than this. If a payment is above the level of additional funds received, then this will trigger the relevant salary sacrifice test and cause issues for the provider.
- Where the allowable expenses are lower than the additional funds received the excess should be paid through the normal PAYE to the worker.
A worker is under SDC and using a model that has no expenses. During an assignment the client asks them to travel to the northern office which results in the worker incurring the cost of a flight and hotel. The client in making the request also agrees to reimburse the expenses. The worker submits the claim and the additional monies are received by the provider along with an expense claim from the worker. The site is clearly a temporary site and therefore the expenses would be allowable. As additional funds have been paid to cover these the workers expense claim can be met without failing the ‘Relevant Salary Sacrifice’ rules as this is additional monies and their ‘general earnings’ have remained the same.
As example 1 but the client also agrees to a per diem amount of £50. The worker submits the claim and the additional monies are received by the provider along with an expense claim from the worker. The site is clearly a temporary site and therefore the flight and hotel expenses would be allowable. The per diem expense cannot be paid in full as there is no basis for this. Where the worker has incurred incidental expenses, such as dinner, then the money relating to overnight expenses may be reimbursed with the balance being fully subjected to PAYE. Where no additional expenses were incurred the full amount of the per diem received would have to be taxed fully and treated as additional income.