The truth about Dispensations

Contractors who work through umbrella companies may find themselves the subject of extra scrutiny by HM Revenue and Customs (HMRC) and in some cases, they may even be liable for tax on expenses from which they thought they were exempt.

It is extremely important for contractors to understand that a dispensation applies to a company's accounting practice, rather than to the actual sums that contractors are entitled to claim.

Dispensations do not automatically entitle you to tax-free cash. Expenses still have to be 'wholly and exclusively’ incurred for business purposes. If the HMRC suspects these expenses have not actually been incurred, they may have grounds for an investigation.

In order for an individual to claim for expenses, they must have been incurred. If you are told that you can claim up to a certain amount for an overnight stay, for example, without having actually slept away from home, then you are being misled.

If the HMRC thinks you might be claiming expenses falsely, it will almost certainly investigate your expense claims very closely. It will want to satisfy itself that firstly, the expenses were actually incurred and secondly, that they were incurred ‘wholly, exclusively and necessarily’ in the course of your work.

The Inspectors may even choose to take a closer look at the umbrella company and take appropriate action if they suspect that the dispensation is being used incorrectly.

Unfortunately the whole dispensation issue is not clear cut as there seems to be no standard wording for dispensations issued by HMRC, and they can vary quite significantly from one office to another.

However what is clear, is that, it is not intended to be a licence to simply claim for expenses up to a certain limit whether incurred, or not".

Accounting Freedom Recommends:

We recommend that even if covered by a dispensation, it is best to keep all receipts as proof of legitimate expenditure, and only claim expenses you have incurred.

We also recommend that you question expense ‘dispensation’ offers from umbrella companies that sound too good to be true. It probably is!!!