Normally this is not an issue but I just so happened to need dnsmasq for DNS on one of the KVM hosts and it would refuse to start due to it being already invoked by libvirt.
You can't just disable the libvirt dnsmasq because it seems required for any virtual network that is active. You can however disable the unused virtual network which has the same effect.
# virsh net-destroy default
# virsh net-autostart --disable default
Then you can configure dnsmasq by editing /etc/dnsmasq.conf and it should work normally.