Umbrella company dispensation is all about the expenses that a contractor can claim when they are working as an employee under the umbrella company. An umbrella company is unable to decide what expenses can be claimed by their contractors. HMRC are the only people who make this decision.
The problems with umbrella company dispensation
Many umbrella companies make use of an HMRC expenses dispensation meaning they don’t have to supply contractors’ expense receipts to HMRC. However, this doesn’t mean you can claim for expenses that you haven’t occurred. HMRC guidelines state that any expenses claimed for must be proven to be “wholly and exclusively incurred in carrying out the duties of employment”, so in simple terms, HMRC require you to have spent the money for the sole purpose of conducting the business, to have proof that you have spent the money (i.e. receipts, invoices), and have proof that you have incurred the cost for the sole purpose of the contract. In Leyman’s terms, an umbrella company dispensation is a list of expenses that the umbrella company doesn’t have to record on a P11D, which is usually required for employee ‘benefits in kind’ in any other employment type. All umbrella companies in the UK have dispensations.
What does the contractor need to know
Once you know this information, it is very clear that as a contractor working for an umbrella company, the more paperwork you keep the better. Receipts, invoices, to you from clients and so on all need to be kept along with proof from the client that the expense was incurred as a direct requirement of the contract where required. If you have an expense that cannot be proven with receipts and cannot be proven to be as a requirement of the contract then you shouldn’t claim it. It is important that you do not try to claim for expenses if you don’t have sufficient evidence or proof because falsified expense claims can result in the contractor being fined.
HMRC and dispensation
Many umbrella companies over the years have been mis-selling their services and as a result, back in 2008 HMRC announced plans to crackdown on umbrella companies who were being dishonest when selling their services to contractors. They announced that they intended to bring umbrella company dispensations to an end which would be terrible news and could be the end of a number of legitimate umbrella companies.
As a contractor working under an umbrella company, it is essential that you ensure that you only ever claim for expenses that have been wholly incurred for business purposes. Some contractors have been confused by claims made by umbrella companies and have claimed the maximum amount of expenses rather than just the amount of expenses that have actually occurred, which can lead to hefty HMRC fines as well as the requirement to pay the underpaid tax. This is why it is so important to do your research before choosing an umbrella company to ensure that you are dealing with a legitimate umbrella company who are not claiming to allow additional expenses when the truth is that they cannot.