egos® - dispensations
14th February 2008: HMRC announce a new initiative on abuse of dispensations. The following is taken from their February 2008 Employers' Bulletin:
Dispensations
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have been revoked when there was a change in the qualifying conditions which was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.
egos comment:
I
mentioned a couple of weeks ago that I had heard whispers of an imminent HMRC
initiative to crack down on umbrellas who are (in their view) abusing
dispensations.
Well, this is it: it is a declaration of war by HMRC on umbrella companies who
they believe are abusing their dispensations.
To an umbrella, its dispensation is its life blood; without a suitable
dispensation, it is wholly unable to compete in the marketplace with those
companies that have one.
But to an umbrella company, the one thing worse than a dispensation being
withdrawn would be for that dispensation to be withdrawn retrospectively. Why?
Because the umbrella can then expect to be hit with a demand for all the tax and
NI that it would have had to deduct from all the expense payments that it made
in the past without deducting tax, before the dispensation was retrospectively
withdrawn.
Even in the case of a medium sized umbrella company, such a demand could easily
hit 7 figures - millions. Even in the case of the most substantial umbrella, it
would almost certainly result in insolvency - in the umbrella being unable to
pay its debts as and when they fall due - and going 'bust', possibly also with
serious personal consequences for the directors (whose trading decisions may
have been responsible for the retrospective withdrawal of the dispensation) -
and possibly with any money due to contractors going into the insolvency 'pot'
and being taken by HMRC as a preferential creditor instead. Imagine that - the
end of the week/month comes, you are expecting your pay cheque - and instead are
told that your umbrella has ceased trading and can't pay you, you'll have to
contact the company's receiver. That's serious.
So, in what circumstances might an umbrella be regarded as abusing its
dispensation, so as to make HMRC feel justified in withdrawing it
retrospectively? The most obvious relates to payment of travel and subsistence.
These can only legitimately be paid tax-free where (a) there is a dispensation
in place, and (b) the workplace satisfies the definition of a temporary
workplace.
Now, a workplace can only be a temporary workplace if, in the course of the
individual's employment by that employer, the individual will be working at more
than one workplace.
This means that for there to be a temporary workplace, there are two more
conditions that have to be satisfied: (i) the employment contract with the
umbrella needs to be for more than just the one engagement, and (ii) perhaps
less obviously, the contract itself must have a degree of continuity between
engagements; it needs to amount to what HMRC regard as an 'overarching'
contract. On the face of it, those two conditions may look the same - but
they're not. There have to be real employment-like obligations between
engagements, including at the least, a guarantee of some payment by the umbrella
during this period, or a guaranteed minimum amount of work over the course of a
year.
HMRC find it difficult to see a contract based on 'no work - no pay' as
satisfying their definition of an 'overarching' contract. This creates real
challenges in a marketplace where the main thrust of the competition between
providers is maximising the returns to contractors, week by week and month by
month.
But umbrella companies whose employment contracts don't contain such provisions,
and which don't fit with what HMRC regard as 'overarching' contracts, are likely
to be vulnerable to this new HMRC initiative; so are their contractors.
Umbrella companies need to review their employment contracts as a matter of
urgency; if they don't know or understand what HRMC expect to see in an
'overarching' contract, then their contracts almost certainly won't qualify.
Umbrellas whose contracts are at present being considered by HMRC may be right
to be particularly concerned - they certainly need to act now.
Contractors could ask their umbrellas when their contracts were last looked at
by HMRC - and what the result was. They should also look themselves at the terms
of their employment contracts, and see exactly what there is in there that will
remain in place once the current engagement ends. If in doubt, again, they
should ask their umbrella - and if still in doubt, maybe they should think about
changing...
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This page was last updated on 14th February 2008
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