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Do you get the impression that you're entering a mysterious world where you are going to be encouraged to make fraudulent expense claims in order to minimise your tax bill?

 

Do you really understand the difference between subsistence and scale rate payments?

 

Well, the good news is that if you read this article, understand your legal status and observe a few key rules you can have complete peace of mind and minimise your tax bill perfectly legally.

Rule 1 - You are an employee, and you have rights!

Let's start by establishing your legal status; you are a freelance contractor and you work through a PAYE Umbrella Company (e.g. OrangeGenie).  So you are actually an employee of OrangeGenie and they are your employers.  You have employment rights through your employer, some of your rights are ‘statutory' rights (e.g. sick pay, maternity pay, paternity pay, and national minimum wage) other rights are granted through your contract of employment (e.g. notice period, place of work, and terms and conditions of assignment).

From a contractual position you will find that your end client will enter into a contract for services with your agency; your agency will enter into a contract for services with OrangeGenie (your employer); and, you will enter into a contract of employment with OrangeGenie.  OrangeGenie will provide you with assignment details for each assignment you undertake. 

Rule 2 - Your intention must be to seek successive assignments and your home is your permanent workplace.

It is important to establish that you are a professional contractor from the outset and that you intend to seek a succession of assignments through OrangeGenie.  OrangeGenie's contract of employment is an ‘over-arching' contract and enables you to establish your permanent work place at your home. You will use your home office to find new (successive) assignments, to undertake skills training, to use as a base to travel to your temporary assignments and to complete the paperwork for your current assignment.  Your assignments (of limited duration - less than 24 months) take place at temporary workplaces.

Why is this important?

• You can claim an allowance for use of your home as office which is free of tax and NI, and
• You can claim an allowance for business travel to a temporary workplace.

If however your intention is to work on a single assignment and then leave our employment, the place of your assignment becomes your permanent workplace and travel between home and office is treated as normal commuting and therefore not an allowable business expense.

Employees who work from home are entitled to a deduction for the expense of business travel to a temporary workplace. 

The cost of business travel includes the cost of any necessary subsistence costs (e.g. meals and drinks) attributable to that journey.  To qualify for a deduction the subsistence costs must be attributable to the business travel in the sense that they are costs incurred in travelling that are additional to any costs that the employee would incur if it were not for the business travel (e.g. travel to a temporary workplace is an additional cost).

Once it is accepted that the employee has incurred allowable subsistence expenses HMRC do not require the employee to take into account the costs saved as a result of the business travel.  For example, if the employee needs to eat in a restaurant while on a business trip they are entitled to an allowance for the full cost of the meal and no deduction or adjustment needs to be made for the costs saved by not eating at home.

Rule 3 - An expense payment is a re-imbursement of expenses that have been incurred

Business expenses must be incurred, wholly and exclusively in the performance of your employment.  They are not intended to provide any profit to the employee; if they did provide a profit then the profit element would become a benefit and be subject to tax and NI.

As your employer, OrangeGenie is obliged to check and authorise claims and where possible verify claims with supporting evidence (e.g. a receipt).  

However in the case of travel expenses where an employee has used his own vehicle it is permissible to provide re-imbursement at statutory mileage rates and not actual costs.  This simplifies the whole process and cuts down paperwork; however it is necessary to carry out checks on a sample of journeys against ‘AA route planner' software to verify the actual mileage claimed.

Employers are allowed to re-imburse some expenses incurred by employees who are carrying out their employment duties at scale rates.   

Typically scale rate payments cover items of expenditure where it may be difficult to obtain a receipt, for example subsistence.  However, where possible, receipts must be retained as evidence that the expenditure has been incurred.  The employee can then claim a scale rate payment which, taking one day with another, will cover the average expense incurred over a given period of time.  They do not need to submit the receipts to the employer to support their claim.   

A scale rate payment is not pitched at a level intended to cover the highest amount that might be spent and it is not be pitched at a level intended to provide an overall profit element.

Rule 4 - Only claim on days that you have incurred travel expenses

It is important to keep a record that supports your travel claim.  This may be done by keeping copies of receipts, maintaining a diary of your travel movements, or keeping copies of your timesheets/invoices. 

 

As a responsible employer OrangeGenie follows all HMRC guidelines in respect of the provision of an over-arching contract of employment, and HMRC have confirmed specifically that our contract of employment is approved by the legal department of HMRC.