Originally posted by Wanderer
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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
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
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