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HMRC internal manual

Employment Income Manual

Dispensations: checking and authorisation of expenses payments

The guidance on this page applies for the tax years up to and including 2015-16.  For tax years 2016-17 onwards dispensations have been replaced by an exemption for amounts which would otherwise be deductible. See EIM30200 onwards.

After a dispensation has been granted, the extent of checking undertaken by the employer will depend upon the scale of the business. They will need to demonstrate that someone other than the employee incurring the expense is responsible for ensuring that the claim made by the employee:

  • Relates to qualifying travel in the case of travel and subsistence expenses
  • Does not include disallowable items. The rules in S336-9 ITEPA 2003 (see EIM31600 onwards and EIM31800 onwards) will apply, and
  • Is not excessive.

Dispensations incorporating actual costs supported by receipts

An employer will normally require every item of expenditure to be vouched for his own benefit - to ensure it has been incurred, and for audit purposes. But this requirement should not be regarded as applicable for trifling expenditure such as small allowances for taxi fares. The employer should be able to demonstrate that regular checks will be undertaken to ensure that only allowable expenses are being reimbursed.

Dispensations incorporating the advisory benchmark or bespoke scale rate payments

Detailed guidance on scale rate payments is at EIM05200 onwards. The employer needs to:

  • Keep sufficient records to be able to demonstrate that the employee was entitled to the scale rate payment; the employee is engaged in qualifying travel, incurred an expense and retained receipts that detail the expense incurred.
  • Be able to demonstrate that regular checks are undertaken to ensure that the travel expenses rules are being followed.

Regular checks

The checks should reflect the conditions outlined at EIM30055. The form and regularity of the checks will depend on the following factors:

  • The size of the workforce.
  • The complexity of the workforce - This will be particularly relevant where the workforce consists of different sections performing different tasks where the entitlement to relief may vary.
  • Uncertainty about whether employees will qualify for relief - Where the temporary workplace rules apply for example (see EIM32000 onwards), employees may qualify for relief at different times and for differing durations. This should be more closely monitored.
  • Unpredictable or non-standard work patterns - where scale rate payments have been agreed for irregular working, the employer may want to check that the agreed conditions for breakfast or evening rates, for example, are being met.
  • The employer has no previous experience in the management of an expenses regime - Where the employer has not previously paid expenses you may wish to insist on a larger or more regular sample check.
  • There is evidence that the employer has failed to manage an expenses regime effectively in the past.
  • The dispensation is part of arrangements such as new or updated Salary Sacrifice schemes and it may not be clear to the employee that the sacrificed sum represents reimbursed expenses.
  • Any other risk factors identified by the Compliance Officer.

The check will need to:

  • Incorporate a review of the completion of the time sheets and supporting receipts obtained and retained by employees sufficient to satisfy the conditions outlined in EIM05200 and EIM30055 and
  • Be undertaken regularly during the year. This may be monthly, quarterly or half yearly depending on the number of factors present. The checks should involve a review of the receipts retained and claims made by a random sample of staff who should not be given prior notice before or during the period that they will be the subject of review. As soon as the review period is over, the employees should be under no obligation imposed by HMRC to retain their receipts. During any subsequent compliance visit the compliance officer would be able to ask to see details of the periodic checks and the employer should be able to clearly demonstrate that they have been undertaken.
  • In cases where a number of the factors listed above are present, involve a higher proportion of the workforce,

In smaller organisations where none of the factors outlined above are present, the directors may know all about the particular expenses incurred by employees, and there may be no need for checking at all.

For personal reasons, or reasons of confidentiality, the proprietors of a business, for example, the director/shareholders, may have a free hand in deciding what they take as expenses. If so, it will not usually be appropriate to give a dispensation for them, but other employees can still be included.

One man service companies and smaller employers

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:

  • Expenditure is independently vouched. This can be undertaken, for example, by an accountant or bookkeeper and
  • Expenditure 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 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.

Vouching of expenses

In some instances, lack of an independent voucher or receipt is not necessarily a bar to inclusion in a dispensation - for example, a subscription to an approved body under Section 344 ITEPA 2003 (see EIM32880).

It is also likely that while undertaking periodic checks, the employer will find that employees have not, on occasion, been able to obtain or retain receipts for qualifying expenses incurred. The employer must monitor omissions to ensure that there are reasons for the lack of receipts, they are not persistent and do not occur throughout the workforce. They should also, where appropriate, be able to demonstrate any action that they have taken to overcome problems of this sort. Do not offer guidance on or incorporate in dispensation agreements minimum amounts that can be claimed without the submission of receipts.