HMRC Dispensations for Umbrella Companies
What is a Dispensation?
An Expenses Dispensation, put simply is a notice issued by HMRC which relieves a Company from reporting details of expenses and benefits on forms P11D or P9D.
Employers ask for a dispensation for expenses payments made, or benefits provided, that are fully tax deductible to an employee. Such payments include the cost of business travel, or benefits provided wholly for work purposes.
Why is it so important to Umbrella Companies?
Umbrella Companies are NOT regulated by any Government Department although they are bound by Taxation and Employment Law.
The awarding of a Dispensation is therefore the only acknowledgement as such by any recognised body that the Umbrella Company is correctly following the application of the guidelines laid out by HMRC for the treatment of Employee expenses by an Employer. A Dispensation does not mean HMRC approval however, indeed HMRC would never ‘approve’ any Umbrella Company, and a Dispensation is purely a mechanism that allows the Umbrella Company to reduce its administration burden.
Because Umbrella Companies process large volumes of expenses claims by Contractors they apply for dispensations to reduce the amount of paperwork involved in processing these claims. Without a dispensation, the amount of paperwork to process every receipt for these claims could be immense and significantly increase their costs.
HMRC agree dispensations based on either published rates i.e. mileage rates, or samples of receipts collected by an employer. In essence, a Dispensation allows an Umbrella Company to reimburse expenses, incurred wholly for work purposes to an employee up to the limit of the Dispensation without having to report the expenses on forms P11D and P9D.
The size of Umbrella Company Dispensations may vary, but this has no bearing at all on how much can legitimately be claimed as a business expense, this will always be the actual cost incurred.
Most Umbrella Companies have an Expenses Dispensation from HMRC, as do most Employers, however some of the more unscrupulous Umbrella Companies make misleading claims that they have ‘special’ Expenses Dispensations that will allow Contractors to claim for expenses that they haven’t actually incurred.
HMRC dispensations for umbrella companies are getting harder and harder to obtain for Providers as a result of previous abuse by some of these unscrupulous providers.
Since 2008, HMRC has been taking action to withdraw Dispensations from Umbrella Companies operating erroneous schemes. Significantly, HMRC also announced that they reserved the right to withdraw these Dispensations retrospectively, with has the potential to put such an Umbrella Company out of business, which of course would have a serious impact on the Contractors working through that Umbrella Company.
‘Special’ Dispensations for Umbrella Companies
When searching for an Umbrella Company, you may come across Companies who claim to have HMRC ‘Approval’ and a ‘Special’ Dispensation that will allow you to claim a significant amount of expenses, day in day out, whether you have incurred these expenses or not, quite often the figures that they quote are linked into an online tax calculator that will illustrate a much higher rate of take home pay than rival Umbrella Companies.
Because these Umbrella Companies do not need to retain receipts by virtue of their Dispensation, they mislead Contractors into believing that they can claim these expenses up-to the limit of the Umbrella Company’s dispensation. In reality, Contractors working via any Umbrella Company can only ever claim for legitimate business expenses that they have actually incurred and they must keep receipts. There are no special tax rules for Umbrella Companies.
What’s the Risk?
Because, some umbrella companies fail to explain what a Dispensation actually means, some Contractors will be claiming the maximum allowable amount for various expenses, rather than the true amount of actual expenses incurred.
This is actually classed as Tax Evasion, the risk in practice does not sit with the Umbrella Company – it actually sits with the Contractor. Should HMRC conduct an investigation into expense claims made by Employees of the Umbrella Company and find that a Contractor has received reimbursed expenses in excess of the costs incurred, it will be down to the Contractor to repay these expenses not the Umbrella Company.
It is also worth noting that the burden of proof lies with the Employee not with HMRC, so it will be down to the Contractor to produce receipts to prove that they had actually incurred the expenses.
Given our own company’s experience of applying for a dispensation post 2008 it is clear that HMRC are now trying to ensure that all Umbrella Companies adhere strictly to the rules and guidelines and that they have very robust procedures to prevent any abuse of this whether deliberate or otherwise. This can only be a good thing and will go some way to creating the level playing field that all reputable providers crave.
So stay well away from any Umbrella Company that claims to have a ‘Special’ Dispensation that allows workers to claim expenses that haven’t actually been incurred.
If you have any questions then please do not hesitate to contact the office on 0203 5827950 and ask to speak to the Contracts Manager.