In this article we highlight some of the key areas relating to the management of employee expenses from an employer perspective. Expense control is a broad subject and links to many other areas, which can make it complex to manage. A key component of success is to ensure that the right people are involved in the process. The employment tax aspects of expenses are crucial to ensure compliance.
This article refers specifically to employees, but can also apply to statutory directors. When we talk about expenses, the rules apply equally to services provided by the employer. For example, either the employee buys a train ticket and makes an expense claim, or the employer simply gives the employee a train ticket; there are rules to follow for both scenarios.
Controlling expenses – Where do you start?
- All controls begin with a policy document, in this way the rules you set are clear. If you don’t have an expenses policy already, we strongly recommend getting one. If you do have one, review it if it has been in place for more than one year. The first thing HMRC are likely to ask for at an employer compliance inspection is a copy of your policy. If you don’t have one HMRC are more likely to conclude you have been careless, because you have failed to give clear instructions to your employees so errors are likely, and this can affect the level of financial liability if errors are found.
- Make sure everyone can access the document readily. The second thing HMRC are likely to ask is whether you have issued the expenses policy to your employees!
- Undertake a risk analysis, this will help you to identify the controls you need in place. We have given some guidance on this below. Determine and implement the controls needed and clearly allocate responsibility for them.
- Input to the policy document should be sought from all relevant stakeholders. This may include Finance, HR, IT, Operational Managers, your employees, payroll and so on.
- If you are in any doubt about the tax treatment, record keeping requirements or reporting needed, seek professional advice.
Risk analysis – Expenses policy drafting and review
Always focus on the areas of greatest risk. Some risks outlined below may be universal but there will always be risks specific to a particular organisation.
- Employment tax compliance risk – accumulating liabilities due to errors in policy/understanding of the tax rules and or processing. The employment tax rules you need to be aware of and follow are complex, ever changing and, on occasion, can be difficult to determine. You must be clear about:
- the tax treatment of the expenses reimbursed/facilities provided.
- capture all ways expenses can be incurred – reimbursement to the employee, direct payment by the employer, company credit cards, supplier accounts etc.
- what information is required to support the business nature of an expense.
- where expenses are exempt, particular conditions may apply to the exemption.
- what reporting is required to HM Revenue & Customs (HMRC), for example through payroll, employee year end returns of benefits and expenses form P11Ds, PAYE settlement agreements where the employer settles tax on minor benefits etc.
- what level of a checking system is appropriate to meet HMRC requirements.
- be aware of timetables for HMRC limit changes, for example, the company car advisory fuel rates are reviewed four times a year.
- Upsetting employees – Money is an emotive subject and can cause significant disharmony where things go wrong such as failure to reimburse employees in a timely manner, not reimbursing expenses of a particular nature where other employers may do so, treating employees unfairly perhaps risking discrimination claims and incorrect reporting affecting the employees such as inaccurate P11D year-end benefit and expenses reports.
- Staff fraud – An unpalatable but regretfully significant problem. According to a 2020 Report by the Association of Certified Fraud Examiners, “Fraud is endemic and costs businesses a fortune.” Estimates are that 5% of all revenue is lost to fraud each year through employee fraud. According to the report staff fraud is often perpetrated by long standing trusted employees of whom 70% are male and organisations with fewer than 100 employees suffer the largest losses per case. However, the report also indicates that leadership is important and statements of values, codes of conduct and anti-fraud policies can halve losses.
- Supplier fraud – If you hold accounts with suppliers, are your checks sufficient to identify erroneous or perhaps fraudulent billings? For example, taxi accounts may send monthly bills with hundreds of journeys, are these subject to review?
- Gifts and hospitality – The Bribery Act 2010 does not explicitly prohibit corporate hospitality and gifts, instead it states that hospitality and gifts which are reasonable and proportionate are allowed. Your organisation will likely have an Anti Bribery policy, does this link to the expenses policy, is additional record keeping required such as narrative explaining the reason for the gift/hospitality?
- VAT – Failure to reclaim recoverable input VAT or claiming non recoverable input VAT. Typically VAT errors relate to inadequate record keeping and incorrect posting of items. For example, VAT on staff entertaining is recoverable but VAT on business entertaining is not. Has the account matrix for expenses been considered in relation to VAT?
- Excessive expenditure – Accruing costs unnecessarily can be avoided by giving clear instructions and limits in the policy.
- Contradictions – Incurring expenditure on goods or services which are in contradiction of your stated policies such as environmentally friendly measures, no alcohol rules etc.
- National Minimum Wage / National Living Wage (NMW) underpayments – Failure to consider interaction of NMW rules with expenses claims. For example, any amount taken from wages to fund uniform, items of clothing, shoes or overalls that an employer requires staff to wear in connection with their work will be an unlawful breach of national minimum wage law if it takes pay below the National Minimum Wage threshold. Even if employees are expected to purchase uniform for themselves, any money they spend on mandatory uniforms should be deducted from wages for the purposes of calculating NMW.
- Director loan accounts – Personal expenses claimed by directors may need to be posted to director loan accounts or recovered from the directors. Is a mechanism in place to deal with this?
- Insurance risks – Have you read your business travel insurance policy to identify any exclusions which may need to be communicated to employees? For example, perhaps your travel policy excludes travel by helicopter or travel to certain locations?
- Interaction with other policies – Does your expenses policy interact with other areas which need to be referenced? For example, health and safety requirements such as ensuring employees are not putting themselves at personal risk while travelling on business?
- Other rules – Are you also subject to rules from other geographical jurisdictions, professional bodies, etc.? Do you need to take account of other rules? For example, expenses paid to trustees of charities may need to be reported in accounts.
- Overseas issues – Do your employees travel in such a way that there is a risk of creating a permanent establishment in an overseas location unwittingly? Or, perhaps simply being deemed as a short term business visitor subject to additional reporting in the UK or overseas jurisdictions? Is additional record keeping required?
Some controls to implement
- Mandate that the employees take responsibility to submit accurate claims within policy. Link failures to disciplinary process.
- Mandate that the authoriser takes responsibility to actively review claims. Link failures to disciplinary process.
- Random checks of claims submitted.
- Operation of a checking system to meet HMRC requirements.
- Segregation of duties.
- Devise systems/checks to identify duplicate claims either by the same employee or where two employees make two separate claims for the same expense.
- Clear allocation of responsibilities.
- Get tax advice when you need it.
- Implement a sign off protocol for the policy so that you can check all relevant parties have approved it.
What to include in an expenses policy
- Explain who is covered by the policy. This will be employees and directors, but do you have different rules for different sections of your business? Make sure it is clear. Also note that if you reimburse self-employed contractors for expenses this should be covered under a separate policy, if you make self-employed contractors subject to an ‘employee’ policy you are creating additional risks around employment status and the tax law for self-employed groups are generally different to those applying to employees. If you are a charity and have volunteer expenses, a separate version of the expenses policy will be required for them as the rules are different for this group.
- Detail the expenses employees may claim for or incur and what are the circumstances applicable including what information and evidence is required to support claims. Focus on the expenses you actually reimburse rather than trying to cover things that are not relevant.
- Include a notice that if the employee wants to claim for something not specifically covered they must seek advance clearance. You may wish to add a relaxation that any expense which needs to be incurred in an emergency will be considered so long as it is reasonable.
- Explain rules for special situations such as mixing business travel with personal travel. For example, the employee adds a few days holiday on to the end of a business trip.
- Confirm the tax treatment of all expenses which may be incurred or reimbursed. If an item is taxable ensure that the policy is clear on who will bear any tax cost – employer or employee.
- Explain how the claims are to be submitted and how reimbursement will be made.
- Give detailed instructions to those responsible for authorising the claims so that they understand what to challenge.
- Ensure responsibilities are clearly allocated.
- Random audit checks are recommended and where employees understand that their claim may be subject to such a random review your fraud risk is likely to be reduced.
- Include a time limit for making claims and you may wish to reserve the right to refuse repayment of claims submitted late.
When should policy documents be reviewed?
When the status quo changes it’s time to review your policies. The effect of the pandemic on employee activities and behaviour has been significant; we simply don’t work in the same way we used to. In any event an annual review is recommended as even if your circumstances have not changed as the underlying tax law may have been amended.
Would you like to know more?
If you would like to discuss any the above or how it might impact your business or employees, please get in touch with your usual Blick Rothenberg contact or one of the Partners on this page.