Dear Contractor Doctor,
I am a contractor, paid weekly by an umbrella company. I do the same journey of 85 miles every day by car. Because my car is very fuel-efficient, I only spend £38 on fuel each week and, when I try to claim a mileage allowance from the umbrella company, instead of simply refunding 40p per mile, they apply a complicated formulation that ends up with me getting less.
The umbrella company says that, on direction from its accountant, it applies the HMRC advisory rate of 11p, divides that into the value of the fuel receipts and then pays me that mileage at 40p per mile. This means instead of me being able to claim £170 (85x5x40p), they only pay me £138.18 (£38/11p x40p).
Is my contractor umbrella company using the correct car mileage calculations?
Contractor Doctor says:
According to Rob Crossland of contractor umbrella solutions provider Parasol, umbrella company contractor expenses should be very straightforward. The umbrella company in this case may be simply misapplying the advice it has received or, says Crossland, it could be something to be concerned about.
“A company does indeed reclaim the VAT element from its employees’ mileage payment by using HMRC’s scale rates, which is currently 11p per mile for cars,” explains Crossland. “So in this case the umbrella company may simply have its wires crossed, applying advice that should have applied to its own VAT claims to the mileage claims of its employees.
“However,” he continues, “this could be an example of an umbrella company’s bad practice in trying to make a fast buck out of its contractors, because best practice allows contractors to claim the full HMRC rate of 40p per mile.”
Contractors pay their own expenses
Crossland adds that Schedule E contractor business expenses, including mileage allowances, are paid gross from the contractor’s own earnings, and that the umbrella company is simply moving its contractors’ money around, with contractor expenses costing the umbrella nothing.
He gives an example: “Say a contractor earns £1,000 in a week and incurs £500 worth of expenses. The contractor is paid £500 with no income tax or National Insurance Contributions (NICs) liability because they are reclaiming expenses, and the remainder is salary paid net of tax and NICs.”
As long as the contractor can prove that the expenses were incurred wholly, necessarily and exclusively in the performance of their duties, claiming expenses and mitigating tax liabilities that way is perfectly legitimate.
HMRC car mileage rates are guidance, not law
“HMRC publish guidance rates that can be used by employers when reimbursing mileage to employees,” says Crossland. “There are two distinct rates. One rate covers petrol only and is normally used for those employees who are provided with a company car and the other for non-company car drivers.
“In the case of an umbrella company,” he continues, “they should be using the non-company car rates which are 40p per mile for the first 10,000 miles and then reduces to 25p per mile. These rates are set by HMRC to cover not just petrol but also the cost of running the car, such as insurance, road tax, maintenance and so on. The umbrella company could reimburse a contractor less than the 40p but it would be very unusual to do so. Contractors should get in touch with their tax office if their umbrella company is not paying them these amounts and ask HMRC to make some enquiries on their behalf.”
The umbrella company could reimburse a contractor less than the 40p but it would be very unusual to do so
Rob Crossland, Parasol
Crossland confirms that, technically, this contractor’s umbrella company is not breaking any laws by enforcing a mileage expenses policy that does not conform to HMRC recommendations. But the umbrella company could be breaking the spirit of the umbrella-contractor relationship, by insisting on a policy that maximises the amount of VAT it can reclaim to the detriment of the contractor.
“This not only lacks transparency, but is also the worst kind of bad practice,” says Crossland. “If the umbrella refuses to change its policy, the contractor may wish to consider changing umbrella solution provider to one that does pay this contractor the expenses he deserves.”
Good luck with your contracting!