HMRC to look into the Abuse of Tax Deductible Expenses  

On 13th February HMRC announced its intention to get tough with employers who abuse their expense dispensations.  The move has been widely seen as a thinly veiled threat to rogue Umbrella Companies who use their expense dispensations as a sales tool to hook contractors into their services with the promise of substantially increased net pay.  We have all seen or heard stories about Umbrella Companies promoting “generous HMRC approved dispensations” and “claim £xx per day – no receipts required.”  Unsurprisingly HMRC have seen and heard the stories too and have announced their intention to revoke “a dispensation retrospectively where there is any evidence of misrepresentation or negligence by an employer, or other person paying expenses or providing benefits in kind.”  Previously HMRC would only revoke expense dispensations retrospectively in “exceptional circumstances.”  

What does this mean? 

In the event that an Umbrella Company is found to have abused an expense dispensation, they can expect to face a demand for the tax and NI contributions that they should have deducted from their employees’ expenses.  It is not hard to imagine a case in which this demand is substantial enough to render the Umbrella Company insolvent.  It is important however, to state that Umbrella Companies and other employers that have been operating their expense dispensations correctly are not a risk. 

So what exactly is a Dispensation? 

Ordinarily when an employer processes expenses for their employees, they will need to record the details on the HMRC form P11D which makes up part of the employer’s annual returns.  They will also need to substantiate these expense claims upon request. This can be quite an administrative burden for the employer, so they can apply to HMRC for a dispensation which will enable them to process certain employee expenses up to an agreed level without needing to record them.  For example, an Umbrella Company may have a dispensation for subsistence expenses of up to £15 per day.  This means that an employee can claim up to £15 per day without the Umbrella Company needing to record it - thereby reducing the company’s administration.  It does not however mean that the employee can claim £15 if they have not spent £15.  Dispensations are not granted to individuals.  Therefore where an amount is shown on a dispensation, it does not mean that HMRC have agreed that the employee is entitled to claim that amount.  Moreover it does not mean that the employee does not need to keep receipts for any expenses claimed. 

Put simply – you should only claim for costs that you actually incur and you should keep all receipts to substantiate your claims. 

Our Response

1st Contact Umbrella has never marketed “special expense dispensations” as a benefit to our clients or recruitment agency partners.  Whilst we recognise that the majority of our competitors are also diligent in their following of HMRC guidelines, we welcome any attempts by HMRC to challenge those it believes are or have been abusing their dispensations.  Such companies are not only seeking an unfair competitive advantage but more importantly, they are potentially putting their contractors at risk.