Contractors who have expenses such as travel, hotel and subsistence paid for them by their own companies have to report these on form P11D (return of expenses and benefits) each year. Tax relief for these business expenses then have to be claimed on the contractor’s self assessment tax return.
All this paperwork can be rendered redundant by applying for a dispensation. A dispensation is a notice from HMRC that removes the requirement for the employer to report certain expenses and benefits at the end of the tax year on form P11D. There is also no need to pay any tax or National Insurance contributions on items covered by a dispensation.
Furthermore, it also removes the requirement for employees to submit claims for matching deductions against such expenses.
Once granted, dispensations last indefinitely although HMRC regularly review them regularly, usually at intervals of five years or less, to make sure that the conditions under which they were issued are being adhered to.
The main expenses routinely covered by a dispensation are:
Expenses and benefits for which an employee cannot claim a deduction against, ie fully taxable such as a car benefit for instance, cannot be covered by a dispensation.
To be able to granted a dispensation an employer must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the contractor to check that the:
If it is not possible to operate an independent system for checking and authorising expenses claims, a dispensation can only be claimed if you:
HMRC's Employment Income Manual 30059 states that:
“Where an employer seeks a dispensation for a one man service company, or in circumstances where the application is in respect of reimbursements to a controlling director/shareholder or where there is no one employed by the company who can check the expenses reimbursed, you should ensure that:
There is no reason why a dispensation including actual expenses, bespoke or benchmark scale rates should not be approved if these conditions are met. You should not refuse or restrict a dispensation just because it is being sought by a smaller employer.
You should, however, consider carefully the reimbursement of subsistence costs, for example, where an independent voucher cannot be supplied. In cases of this kind it is particularly important that it should be clear from the dispensation letter (see EIM30085) that the dispensation applies to a limited class of payments only and does not cover whatever the director decides to take as expenses.”
A dispensation can be claimed at any time. In general, dispensations take effect from the date on which HMRC issues them. However, HMRC may agree to a dispensation taking effect from the beginning of the tax year in which it is applied for it if the freelancer's company was paying those expenses and making the benefit payments at that earlier date.
The easiest way to apply for a dispensation is to use HMRC's online form although you can also apply by completing and posting form P11DX (PDF).