If you are an employer, you may need to apply for a dispensation.
Because expenses reimbursed from an employer to employees – including directors – should be included as income on a personal tax return, with a corresponding claim of expenses for exactly the same amount. This amounts to a lot of work for the taxpayer which makes absolutely no difference to the amount of tax payable. In order to avoid this, an employer must apply for a dispensation, which satisfies HM Revenue and Customs (HMRC) that expenses claimed are either supported by receipts or verified by someone other than the claimant.
A common example of something which may be caught is mobile phones. If a company director has a mobile phone required for business, the tax treatment on the individual will be different in the following three scenarios:
- The contract is between the employer and the mobile phone operator,
- The contract is between the employee and the mobile phone operator, and the cost is paid directly by the employer,
- The contract is between the employee and the mobile phone operator, and the cost is paid by the employee and reimbursed by the employer.
Good stuff eh? See here for more information on mobile phones.
A dispensation, once approved, can be in place for several years (or indefinitely) and will mean saving work for the employer, the employee and HMRC – a win-win-win!
The following link will take you to the HMRC website, which has summary information as well as detailing the process for claiming a dispensation.
NB It has been usual Revenue practice in the past to backdate the application to the start of the tax year (in this case, 6 April 2011), although there is no guarantee that this will be done in future. You will appreciate that the dispensation needs to be in place before 5 April 2012, therefore you should deal with this sooner rather than later.