The most common term used in marketing by Umbrella Companies is ‘dispensation’. But what does it really mean?

HM Revenue and Custom’s definition is “a dispensation is a notice, issued by an Inspector, which relieves you from reporting details of expenses and benefits on forms P11D or P9D”

According to some Umbrella Companies, a dispensation is a great way for contractors to increase their take home pay without ever having to pay out for any ‘expenses’ in the first place.

The first explanation only helps if you know what a P11D or P9D is; the second sounds great but is totally misleading.

So what is a dispensation and why is the term so over used?

Almost all Umbrella Companies have dispensations because they save time and therefore money. If an umbrella company doesn’t apply to HMRC for a dispensation, they have to record every single expense that every single contractor claims on a form which is called a P11D; as well as that every expense has to be accompanied by a receipt.

Can contractors claim whatever is on the Umbrella Company’s dispensation as an expense every day, even if they haven’t spent anything?

Of course not! Contractors can only claim as an expense, what they have spent and that cost must be wholly and exclusively incurred because of the contract.

Is the dispensation an ‘HMRC approved’ expenses policy?

No. HMRC don’t approve anything – the dispensation is just there to save time.

What happens if a contractor claims an expense they didn’t actually incur?

The HMRC investigation window is 6 years so contractors’ finances could be looked into at any point during this time. If you originally recommended an Umbrella Company that pushed un-receipted expenses or heavily focused on unrealistic take home pay and that company is subsequently investigated, it likely the contractor will come back to you and question why you recommended them.

This is why, as a recruiter, you must feel totally confident of your recommendations whether it’s a formal agreement or informal recommendation. To pass on a company’s details you must have absolute assurance that they only offer best practice advice that won’t cause you or your contractor back taxes, penalties, or extra stress through being given poor advice.

If you have any further questions after reading this or would like some more information, please contact a member of our team on  01206 713680.

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