A dispensation is a notice from HMRC that removes the requirement for the employer to report certain expenses and benefits at the end of the tax year on forms P11D or P9D. There is also no need to pay any tax or National Insurance contributions on items covered by a dispensation.
It also removes the requirement for employees to submit claims for deductions against expenses previously reported on forms P11D or P9D.
Once granted, dispensations last indefinitely. However, HMRC reviews them regularly (usually at intervals of five years or less) to make sure that the conditions under which they were issued still apply.
What items can and can’t be covered by a dispensation?
You can apply to HMRC for a dispensation to cover expenses or benefits for which your employee gets a full tax deduction.
The main expenses routinely covered by a dispensation are:
- travel, including subsistence costs associated with business travel
- fuel for company cars
- hire car costs
- business entertainment expenses
- credit cards used for business
- fees and subscriptions
Systems you must have in place
You must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the employee claiming the expenses check that the:
- amount claimed isn’t excessive
- claim doesn’t include disallowable items
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