Scale Rates

[LisaContractorUmbrella]

Sounds as though HMR&C are moving goalposts again:

"Scale rate payments and the Advisory Benchmark Scale rates can only be used for expenses made to or provided for any employees by the employer and where agreed as part of a Dispensaton: they cannot be used by an employer to arrive at a sum on which tax and NIC's "relief" is given each pay day where the expenses are incurred by the employee and not reimbursed by the employer"

This may explain why we have had so many enquiries about umbrella companies reducing allowable expenses - we assumed it was just one or two scale rate dispensations being revoked but it appears that it is all of them. At least this will create a level playing field at long last

[Wanderer]

we assumed it was just one or two scale rate dispensations being revoked but it appears that it is all of them. At least this will create a level playing field at long last

So no more dispensation envy from LisaContractorUmbrella then?

I agree that it was unfair situation. According to HMRC's guidance, an employer (ie umbrella) might have a dispensation for £50 per night for hotel costs and provided the employee incurred some expense (however big or small) on hotel accommodation, they could pay an employee the full £50 of the scale rate dispensation even if the employee spent less than this whereas without a dispensation for hotel costs the employer could only allow their employee to claim the actual cost incurred.

So now that the game is up we see that despite a concerted PR campaign to the contrary, it always was the case that an umbrella with a generous scale rate dispensation from HMRC had a distinct competitive advantage because they could quite legally allow their workers to inflate their expenses claims by claiming the full scale rate in the dispensation rather than the actual (lower) cost incurred, thus increasing their take home pay. The contractor was obliged to retain a receipt but crucially there is no requirement to produce a receipt to the umbrella, all the umbrella had to do was randomly audit a selection of contractors which makes it easy to cover up when "genuine mistakes" are made by contractors claiming expenses.

So what is this going to mean going forward? No more flat rate payments for reimbursed expenses and from now on so the reimbursed amount may only be the exact amount of the expense incurred? Or just more FUD....

[malvolio]

It will mean an awful lot of p!ssed off people having to pay tax on the same basis as everyone else....

[speling bee]

Never worked through a brolly so haven't paid this much attention.

I understood that dispensations did not allow employees to claim unreceipted expenses from a tax perspective, but just meant brollies didn't need to see the receipts. Is this incorrect?

[moggy]

scale rate payments are different to round sum allowances:

HM Revenue & Customs: Expenses payments

Round sum allowances
Definitions or restrictions

You pay a round sum allowance to an employee.

A round sum allowance is an amount paid to an employee regardless of how they will spend it. In this sense it differs from reimbursements and scale rate payments that are calculated to cover expenditure actually incurred by an employee.

[Wanderer]

I understood that dispensations did not allow employees to claim unreceipted expenses from a tax perspective, but just meant brollies didn't need to see the receipts. Is this incorrect?

HMRC's explanation of dispensations explains that an employer with a scale rate dispensation for a particular type of expense doesn't need to see proof of expenditure for every single claim of that type nor do they have to record them on the P11D (thus reducing admin). However, the employer is required to carry out periodic audits of their employees to make sure that there is actually an expenditure being incurred when the scale rate payment is claimed and this is why employees are told to keep receipts even though they will not be asked to produce them unless they are audited.

The key thing about a dispensation is that an employer can pay the flat amount stated in the scale rate dispensation without any BIK tax due provided that some expense (however small) was actually incurred. So if the employer (umbrella) has a scale rate dispensation for lunch of £10 and the employee spends (say) £2.50, the employer can still pay the employee the full £10 without any BIK tax being due or a receipt being submitted with the claim (the receipt is still required to be retained by the employee in case of an audit).

The problem occurred because these dispensations were wide open to abuse by umbrellas because they are not actually "employers" in the traditional sense. Expenses paid out by an employer reduce company profits, "expenses" paid out by an umbrella don't make any difference to an umbrella's profitability, in fact the more they allow in expenses the better for an umbrella! Therefore, umbrella companies are tempted to try and max out the amount they can account for as "expenses" to order to compete with other umbrellas by reducing the tax that the contractor would pay. A generous dispensation was a way to do this and as Lisa says - the different dispensations and expenses policies created an uneven playing field.

Now HMRC can apply the sanction of withdrawing a dispensation from an umbrella company and this could even be done retrospectively resulting in the umbrella becoming liable for the full PAYE and NI on all the scale rate expense payments they ever made. There was a lot of sabre rattling from HMRC a few years ago but it never happened. Why? Because it's the umbrella who would have to repay all the PAYE/NI they avoided using the dispensation and despite what they would have people believe, it's not feasible that they could recover all of this money from their employees, especially if the employees had moved on. The nuclear option is for the umbrella company to go into liquidation resulting in both the employees (contractors) and HMRC not getting paid money they are owed and blame it all on HMRC being unreasonable...

From what Lisa is saying, they may be going to withdraw the dispensation across the board which is probably the fairest way of doing it as it levels the playing field when it comes to expenses. It will be interesting to see how this pans out.

scale rate payments are different to round sum allowances:

Correct. There are different rules for a round sum allowance where no dispensation exists (which is taxable) and a round sum allowance where a scale rate dispensation exists (which is not taxable provided an expenditure, however small, actually occurred).EIM05200

[speling bee]

HMRC's explanation of dispensations explains that an employer with a scale rate dispensation for a particular type of expense doesn't need to see proof of expenditure for every single claim of that type nor do they have to record them on the P11D (thus reducing admin). However, the employer is required to carry out periodic audits of their employees to make sure that there is actually an expenditure being incurred when the scale rate payment is claimed and this is why employees are told to keep receipts even though they will not be asked to produce them unless they are audited.

The key thing about a dispensation is that an employer can pay the flat amount stated in the scale rate dispensation without any BIK tax due provided that some expense (however small) was actually incurred. So if the employer (umbrella) has a scale rate dispensation for lunch of £10 and the employee spends (say) £2.50, the employer can still pay the employee the full £10 without any BIK tax being due or a receipt being submitted with the claim (the receipt is still required to be retained by the employee in case of an audit).

The problem occurred because these dispensations were wide open to abuse by umbrellas because they are not actually "employers" in the traditional sense. Expenses paid out by an employer reduce company profits, "expenses" paid out by an umbrella don't make any difference to an umbrella's profitability, in fact the more they allow in expenses the better for an umbrella! Therefore, umbrella companies are tempted to try and max out the amount they can account for as "expenses" to order to compete with other umbrellas by reducing the tax that the contractor would pay. A generous dispensation was a way to do this and as Lisa says - the different dispensations and expenses policies created an uneven playing field.

Now HMRC can apply the sanction of withdrawing a dispensation from an umbrella company and this could even be done retrospectively resulting in the umbrella becoming liable for the full PAYE and NI on all the scale rate expense payments they ever made. There was a lot of sabre rattling from HMRC a few years ago but it never happened. Why? Because it's the umbrella who would have to repay all the PAYE/NI they avoided using the dispensation and despite what they would have people believe, it's not feasible that they could recover all of this money from their employees, especially if the employees had moved on. The nuclear option is for the umbrella company to go into liquidation resulting in both the employees (contractors) and HMRC not getting paid money they are owed and blame it all on HMRC being unreasonable...

From what Lisa is saying, they may be going to withdraw the dispensation across the board which is probably the fairest way of doing it as it levels the playing field when it comes to expenses. It will be interesting to see how this pans out.



Correct. There are different rules for a round sum allowance where no dispensation exists (which is taxable) and a round sum allowance where a scale rate dispensation exists (which is not taxable provided an expenditure, however small, actually occurred).EIM05200

Thanks.