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** Make sure you read our February 2009 guide to contractor umbrella companies and expenses dispensations **

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HMRC have waged war on contractor umbrella companies who have been abusing dispensations.

Umbrella Companies compete in the marketplace on the basis of the generosity of its dispensation (i.e. what contractors using the company are allowed to claim in expenses).

Not only have HMRC announced their intention to withdraw dispensations from umbrella companies, they may also withdraw dispensations RETROSPECTIVELY, which could be financially crippling to umbrella companies that are caught out.

For expert analysis on what this means for your umbrella company, read this commentary from legal expert, Roger Sinclair.

HMRC Dispensation Announcement

HMRC published the following information on its website earlier this week:

Where we are satisfied that there is no liability to income tax or NICs for certain expenses paid or benefits given to employees, a notice of dispensation can be issued. This means that, as an employer, you do not need to report any of the expenses and benefits included in the dispensation on forms P11D or P9D. It also means your employees do not need to put them on their Tax Returns.

Once granted a dispensation would normally continue to apply until the qualifying conditions are no longer satisfied. If however a dispensation has been operated incorrectly, it can be revoked retrospectively.

Previously our practice was to revoke a dispensation retrospectively, only in exceptional circumstances. We have discovered a small number of employers who have taken advantage of this and have gone on to abuse the basis on which a dispensation was applied for and/or operated on.

Legal advice has suggested that our current practice is unnecessarily restrictive and as a result we are changing our practice in relation to retrospective revocation of a dispensation.

We will now consider revoking 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. Examples of this can include:

- If an application for a dispensation did not provide all the relevant information, or

- If there was a change in the way the expenses and benefits were made available to employees meaning the qualifying conditions were no longer met, and we have not been informed of the change.

This will not affect the great majority of employers who apply for and operate dispensations correctly. Revoking a dispensation retrospectively should only happen if it should not have been granted in the first place, or if it should have been revoked when there was a change in the qualifying conditions which was not notified to us.