One of the gripes that many umbrella companies have it the inconsistency of scale rates between umbrellas which in turn creates an unlevel playing field.
So what is a scale rate and how does this differ from a dispensation?
A dispensation is simply a time saving device. Where an employer reimburses expenses and those expenses are allowable for tax purposes the effect is that one cancels out the other – so if one cancels out the other and there is no effect why does an employer have to report those payments to HMRC? The answer is to apply for a dispensation and then there is no need to report those expenses for which a corresponding allowance is due.
Let’s assume that the umbrella company has a dispensation. There is still the mammoth task of reimbursing differing amounts of expenditure and checking against documentary evidence which in turn needs to be retained as an audit trail for production to HMRC if necessary.
In order to save further work on both sides HMRC are likely to agree to a scale rate reimbursement provided it does no more that reimburse, on average, the actual expenditure. They expect the employer to conduct a sample survey and agree a figure which falls somewhere in between the two extremes. This then saves the hassle of the employee having to obtain receipts (where it is sometimes difficult), it saves the employer having to inspect and retain the documentary evidence and saves HMRC time when conducting an audit.
Scales rates often apply to meal allowances but the problem that HMRC then have is being certain that the employee has actually incurred the cost of a meal. To be entitled to a meal allowance the employee must have incurred the expense of a meal as part of the journey and the cost must be more than would otherwise have been spent. This cuts out taking a packed lunch from home.
HMRC are in a bit a dilemma over this because although on the one hand they would like to agree scale rates because it saves time all round they have to certain that the employee has incurred the expense.
A few months ago HMRC introduced benchmark scale rates for meal allowances. In time these will create a level playing field but although scale rates are to be granted where the obtaining of a receipt is sometimes difficult HMRC are now having cold feet, particularly with umbrella companies, about applying the benchmark scale rate and not asking for evidence in support.
The problem with umbrella companies is that they bank the gross amount earned by the contractor, deduct their fee, and divide the balance between HMRC and the contractor – a proportion of the latter’s share being tax free if it relates to expenses. The expenses are not paid in addition to salary so the quantum of the expense has no effect on the umbrella unlike an employer who pays expenses in addition to salary.
The employer who pays expenses in addition to salary is more likely to take an interest in the amount of expenses claimed by its employees than the umbrella company. HMRC recognise this and are now insisting that umbrella companies maintain records sufficient to prove that they are reimbursing meal allowances, even at the benchmark rates, only where the allowable expense has been incurred. Umbrella companies need to be aware of this and take the necessary steps – failure to do so could be catastrophic when the taxman comes a calling …..
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