Dispensation notice
The problem arises from a commonly held misunderstanding among contractors, that they have no need to verify what the HMRC classes as 'qualifying travelling and subsistence expenses'.
Mr Roback points out that a tax inspector may issue a managed service or 'umbrella' company with a dispensation notice that exempts it from reporting certain expenses payments and ‘benefits-in-kind’ on income tax year end P11D and P35 forms. This is because they are already deemed to be incurred in the performance of employment duties, and therefore not subject to Class IA national insurance contributions or tax.
However dispensations do not constitute an automatic entitlement to tax-free cash. Qualifying expenses still have to be actually incurred 'wholly and exclusively' in the conduct of a contractor's business, so that if the HMRC suspects these expenses have not actually been incurred, they may well then investigate the circumstances of the claims.
Barry Roback |
Mr Roback said: "It is important for contractors to understand that a dispensation applies to a company's accounting practices, rather than to the actual sums that contractors are entitled to claim.
“Individual claims must still have been incurred. If you are told that you can claim up to a certain amount for an overnight stay, for example, without having actually slept away from home, then I am afraid you are being misled.
"The principle of an agreed round sum allowance, is that expenditure above this figure must be supported by a valid receipt, while expenses actually incurred up to this sum, can be claimed without the need for the company paying them to retain receipts."
Fase claims
Mr Roback warns that if the HMRC thinks you might be claiming expenses falsely, it will almost certainly investigate your working patterns and practices very closely. It will want to satisfy itself that firstly, the expenses were actually incurred and secondly, that they were incurred ‘wholly, exclusively and necessarily’ in the course of your work.
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He said: "However, as usual in tax matters, life is not as straight forward as it should be. There seems to be no standard wording for dispensations issued by HMRC, and they can vary quite significantly from one office to another. Furthermore, a HMRC dispensation only covers the specific circumstances for which it was issued, and for the type and amounts of expenses payments it specifically mentions. It is not intended to be a licence to simply claim for expenses up to a certain limit whether incurred, or not".
Meal allowances
Another common misunderstanding is over meal allowances. HMRC believes that you have to eat wherever you are and whatever you are doing, and so you can only claim subsistence expenses when you are working at a temporary work place, as opposed to your normal place of work, or when you have to stay away overnight for work purposes. These allowances are meant to cover the additional cost of eating over and above your normal expenditure for such meals, although often HMRC will have agreed a ‘per diem’ rate for such expenses.
Keep receipts
In conclusion, Mr Roback recommends that even if covered by a dispensation, it is best to keep all receipts as proof of legitimate expenditure, and only claim expenses if you can verify them, just in case the Inland Revenue chooses to look at your tax return in a little more detail than normal.
He also recommends that common sense dictates that you question expense ‘dispensation’ offers from managed services companies that sound too good to be true. He advises that they probably are!
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Susie Hughes © Shout99.com 2006
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