IT Contractor Umbrella Company - Compare - Guides

Some contractor umbrella companies claim to have special expenses 'dispensations' from HMRC. We explain why such claims are often misleading and why contractors can only ever claim for expenses they have actually incurred solely for business purposes.

The Dispensation Myth

If you are investigating potential umbrella companies to use, you may well have heard claims that some umbrella schemes have been granted special expenses dispensations from HMRC. Some unscrupulous contractor umbrella schemes claim they can save you more money than their rivals as a result of such dispensations. They may imply that you can claim £x for expenses regardless of whether you incurred those expenses or not. They may also suggest that they have been given special treatment by HMRC and can therefore provide more generous expense allowances that their rival companies.

For example, an umbrella company may have a dispensation for its 'employees' to claim up to £95 per night for overnight accommodation. Some companies may mislead contractors into believing that they can claim £95 per night when away on business, regardless of the actual cost - which may be £60 in this example.

In reality, IT contractors working via any umbrella company can over ever claim for business expenses they have actually incurred - and they must keep receipts. There are no special tax rules for umbrella companies.

What is a Dispensation?

According to HMRC (here), a dispensation is "a notice, issued by an Inspector, which relieves you from reporting details of expenses and benefits on forms P11D or P9D."

Umbrella Companies (and other employers) can "ask for a dispensation for expenses payments you make, or benefits you provide, that would attract a full tax deduction in the hands of the employee. Examples include payments to meet the cost of business travel, or benefits provided wholly for work purposes."

In essence, dispensations are provided to umbrella companies to help them cut down on paperwork. If umbrella companies had to collate all the receipts relating to every business expense claimed by every client, the administrative burden could be immense.

The size of dispensations may vary between umbrella companies, but this has no bearing at all on how much you can legitimately claim as business expenses.

Dispensations are not handed out to umbrella companies as 'prizes', and HMRC does not 'approve' individual umbrella companies. Importantly, the dispensation does not apply to the contractor, it exists purely for the benefit of the umbrella company's administration team.

What's the problem?

Unfortunately, some umbrella companies fail to tell their clients what a dispensation is, with the result that some contractors will be claiming the maximum allowable amount for various expenses, rather than the true amount of actual expenses. This is tax avoidance, and the contractor rather than the umbrella company will be liable to pay back any additional taxes in the event of an investigation.

HMRC Crackdown

As a result of dispensations being used to mis-sell umbrella company schemes, HMRC announced a crackdown on unscrupulous schemes in 2008.

Crucially, not only did HMRC announce their intention to withdraw dispensations from umbrella companies, they may also withdraw dispensations retrospectively, which could be crippling to umbrella companies that are caught out.

Roger Sinclair from egos has written a helpful legal piece explaining why umbrella companies must ensure that they don't abuse the travel and subsistence expense rules - or they may risk having their expenses dispensations revoked retrospectively, potentially putting some companies out of business. The article also addresses the issue of 'overarching contracts' and how umbrella companies should ensure that their employment contracts are not leaving them and their contractors vulnerable to this HMRC dispensation crackdown.

John Brazier, MD of the PCG said that his organisation supports the presence of umbrella companies in the marketplace.

"We do not want to see any heavy-handed action that would make them unviable. At the same time, we are aware that the way some umbrellas use expenses policies is a genuine problem."

Unsurprisingly, since this HMRC announcement in early 2008, we rarely see umbrella companies using unethical 'dispensation' claims in their marketing material.

Conclusion

To put it simply, you can over ever claim expenses that have been incurred wholly and exclusively for business purposes. Even if an umbrella company has a dispensation up to a certain amount for a specific expense, you must only ever claim for expenses you have actually incurred. If an umbrella company claims you can earn extra tax-free income due to its 'generous dispensation allowance' - keep well clear!