Dispensations dispensed like smarties

I've long been an advocate of employers seeking dispensations to cover straightforward business expense reimbursements. But I've just learned something rather shocking. Let me explain.

First, some background.
If the application for a dispensation is agreed by HMRC the employer has a reduced compliance burden. The other advantage is that the employees do not have to include the expense reimbursements on their tax returns and claim tax relief - to avoid being taxed thereon.

Earlier this year there were reports that HMRC was cracking down on contractor umbrella scheme dispensations. HMRC announced that they would not tolerate negligence or misrepresentation. They would be looking to identify expenses and benefits provided under a dispensation when they should have been subject to income tax and NICs. In such cases, said, HMRC they would pursue retrospectively the income tax and NICs liabilities due when the expenses payments and benefits were originally provided.

And it is these same contractor umbrella companies (and agencies) that are the target of a recent discussion paper, published jointly by HMRC and the Treasury, on tax relief for travel expenses. It focuses specifically on 'temporary workers and overarching contracts'.

Following on from the earlier announcement we learn (at para 6.2) that:

"some umbrella companies and employment agencies often urge their employees to claim the maximum amount their dispensation allows, regardless of whether these expenses were actually incurred, or that the underlying journey actually qualified for relief."

And at para 6.4 that:

"Evidence, both from HMRC compliance activity and anecdotally from the sector, suggests that the abuse of dispensations by umbrella companies is widespread"

So, you might wonder, as did I, why do HMRC continue to dispense dispensations like smarties when they are rightly concerned about the potential for abuse?

It was when reading Anne Redston's excellent Comment article on this subject in the current issue of Taxation magazine that I learned the answer and identified a solution.

Anne asks the same question as do I. She notes that:

The difficulty, apparently, is that HMRC have no way of identifying the umbrella companies in advance. The tax office receives a fairly standard dispensation request, and, in the interests of reducing red tape, agrees it, only to find out later that it is an umbrella with 3,000 temporary workers."

Is my answer to that issue too simple? It must be or surely HMRC would already have changed their procedure. Couldn’t HMRC simply put a cap on the number of employees that would be covered and the aggregate amounts that can be paid within the exemption granted by the dispensation? How difficult can it be to amend the application form? Or am I missing something obvious?