For many years we have advised clients not to apply for a dispensation for the payment of expenses and to complete a P11D at the end of a tax year, with a Section 336 claim, so that no tax is payable.
In most cases Professional Contractors and Freelancers would pay no tax as all their expenses would be tax deductible under the normal expense rules.
Our advice had been based on continual refusal by HMRC to accept dispensation applications from Professional Contractors and Freelancers even though it seemed that they had an uncessary burden of red tape in this instance.
We have also recently (January to March 2009) been receiving review enquiries from HMRC for clients that have had dispensations agreed in 2000, before the time when HMRC had seemed to decide to start refusing applications.
Current HMRC guidance in this area is still not as clear as we would like, although with recent announcements it is clear that HMRC have adopted a more reasonable approach.
In EMM3055 under Section 65(1) to (4) ITEPA 2003 the HMRC Inspector has to be satisfied that certain conditions can be met before a dispensation is given.
The guidance manual refers to EMM30059 where HMRC say that it will not normally be appropriate for Directors to have a dispensation for their expense payments.
But they also say that a dispensation will be allowable where:-
the application is for a dispensation in respect of reimbursements to a controlling director/shareholder of expenditure that:
- is independently vouched and
- is allowable as a deduction from earnings (e.g. if necessarily incurred on travelling in the performance of the duties) and
- the Officer is satisfied that no additional tax is at risk,
there is no reason why a dispensation should not be approved.
In
ECH10050 the HMRC Inspectors internal guidance advises that
Staff should accept employers’ statements on Forms P11DX without challenge unless there is clear evidence that this is not appropriate (see ECH10055).
and
ECH10055 says nothing against a Director of a Limited Company applying for a dispensation.
HMRC may approach individual Directors who apply for a dispensation and the guidance manual says
Where it is necessary to seek further information the following channels will be used
- Telephone to resolve minor queries
- Letter to ascertain further details/ documents
- Meetings , where issues are complex
- All contact should be restricted to the issues in doubt. The approach should not be used as an opportunity to examine every aspect of an employer's benefit arrangements.
The HMRC website gives details of the methods used by an Inspector in approving a dispensation, and there are no links to any other guidance in this workflow that suggest that owner/manager limited companies will be ruled out for dispensation applications.
Finally in what appears to be more recent guidance from HMRC on their PAYE for Employers section the HMRC confirm that
If it is not possible for you to operate an independent system for checking and authorising expenses claims – for example, because you are the sole director of your company and you have no other employees – you will only be able to obtain a dispensation if you:
- ensure all expenses claims are supported by receipts for the expenditure
- demonstrate that the claim relates to expenditure that can be covered by a dispensation – your receipts may be sufficient for this purpose, but if not you must retain additional information
This seems the most positive indocation that HMRC will now look at accepting dispensation applications from Professional Contractors and Freelancers where the new scale rates are applied and all receipts to prove expenditure are kept ( but not necessarily accounted for , you will account for the cost of the scale payment itself).
After all as long as the Limited Company is operating in a compliant manner then a dispensation works in HMRC favour as the management of P11D filing uses up resources that could be better used on compliance testing.
It is important that the dispensation application only applies to certain agreed expenses, and that a director agrees to keep all recipts as evidence of actual cost being sufferred as a result of working away from home on a qualifying temporary workplace.
It is better to expect that HMRC will contact you and ask for details of what receipts you are going to keep to prove that you have incurred expenditure when claiming the scale payments.
A dispensation can be applied for by using form P11DX and there is further guidance in this document.
We now believe that for Professional Contractors and Freelancers it is worth applying for a dispensation for your subsistence payments, but to accompany the dispensation form with a letter from yourself confirming your intention as a director to keep all receipts and to only apply scale payments where a cost of an amount equal or more to the scale payment has been suferred by yourself.
The letter should also request that the dispensation be applied for the whole of the tax year in 2009-10.
Due to the date of publication of the guidance which was 4 days before the whole tax year to which it applies we see no reason why HMRC should withold the application to the whole tax year.
You can see a sample P11DX application here .
When HMRC issue a dispensation it will relieve you of the burden of completing a P11D each year for the expense payments agreed in the dispensation.