A dispensation is a notice issued to an employer by Income Tax Division that relieves them from the requirement to deduct ITIP from business expenses payments and from reporting these expenses payments on form T9.
It indicates that the Income Tax Division is satisfied that there are sufficient controls in place, within the business to ensure that:
- business expenses claims are genuinely business in nature
- receipts are provided to back up expenses claims made by employees
- employee’s do not profit from the reimbursement of out of pocket expenses
- directors do not sign off their own expenses
- there is third party checking of expenses paid for directly by a business to ensure that there are no private expenses, which would need to be repaid in full to the company to avoid a benefit in kind charge
- petty cash is monitored and controlled effectively by a business
A dispensation can cover any type of expenses payment (apart from a round sum allowance). Payments typically covered by a dispensation include:
- business travel and accommodation
- business entertaining
- mileage allowance when an employee uses their own vehicle for business purposes
A dispensation cannot cover any round sum allowance paid. A round sum allowance is a set amount that is paid to cover an expense that may or may not be incurred: e.g. an employee may be paid £20 per month in case they use their own vehicle for business purposes. Where expenses are not reimbursed on a receipts basis and a round sum payment is made to an employee, there is the possibility that a profit could be made by the employee on expenses incurred. Any round sum payment made or any expenses repaid without the production of a receipt, should go through the payroll and be subject to tax and national insurance.
Some examples of these payments are:
- clothes allowance
- entertaining allowance
- fuel allowance
- lodging allowance
- meals allowance
- standby payments
- subsistence payments
- tool money
- travel allowance
When a dispensation is agreed it will clearly state which employees it will apply to and who will be excluded.
An employee or director who authorises their own expenses will be excluded from a dispensation and the employer will have to report all expenses payments on form T9.
To apply for a dispensation you should write to the Third Party Manager in the Income Tax Division setting out:
- the employees or group of employees to be covered by the dispensation
- the types of reimbursements to be included within the dispensation
- the types of direct expenses that the business pays for on behalf of its employees which are required to be included within the dispensation i.e. company accounts with suppliers, company credit card
- the amounts involved
- details of your system for controlling and authorising any reimbursements, to ensure that any expense claim is receipted and genuinely business in nature
- details of your system for controlling any expenses paid directly by the employer, to ensure that there are no personal expenses being met by the business on their employees behalf
If your company has specific rules regarding the reimbursement of expenses it would be helpful to provide a copy with your dispensation request. The office would also ask that you supply a copy of an expenses claim form, so that it can be reviewed within this process and held on file.
Further information may be requested before a decision is given. It is important to note that a dispensation only continues to be effective as long as the circumstances remain unchanged or until it is withdrawn.