Guide to HMRC expense compliance: Maximising efficiency

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Ensuring HMRC compliance is a two-way process.

You need to ensure that all your tax responsibilities are being met but also that you’re able to reclaim any legitimate HMRC reimbursements. This requires getting to grips with VAT.

But the complexity of VAT legislation means that many companies are failing to properly manage this area of expense management and are losing out on money they’re entitled to. And the amounts being lost can be considerable.

Analysis by Webexpenses examined the typical out-of-office expenses claimed by a business traveler. It was found that around £87 could be reclaimed each week in VAT from various travel and accommodation costs.

Applied to a company of 100 employees, which represents £351,800 of annual VAT reimbursements. So it really pays to stay on top of VAT reclaims.

What can be claimed?

On the surface, working out what can be claimed should be simple.

The basic rules are: 1. You can reclaim VAT on employee expenses for meals and accommodation that you pay for and, 2. You can’t reclaim VAT if you pay your employees a flat rate for expenses.

To work out exactly what can be reclaimed, the HMRC guidance is that: “You can usually reclaim the VAT paid on goods and services purchased for use in your business. If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.”

This is where things get tricky. The ‘usually’ qualifier is used because there are various exceptions based on different types of costs. You can find the HMRC of these different rates here.

Common expenses: What does and doesn’t have VAT?

  • Public transport 0%
  • Hotels 20%
  • Meals 20%
  • Client entertaining 20% (0% reclaim)
  • Staff entertaining 20%
  • Off street parking 20%
  • On street parking 0%
  • Fuel/mileage 20% (not just the fuel costs)

The challenge for finance teams is ensuring that people are able to negotiate these rules and correctly identify which VAT costs can be reclaimed. It’s a task that has been made considerably easier when using a digital expense management setup.

A system such as Webexpenses automatically keeps track of each correct VAT rate and works out how much can be reclaimed. Any changes to HMRC rates will be automatically applied to expense categories.

Managing mileage VAT

A common area of confusion with VAT is mileage claims.

VAT can be reclaimed if:

  • Travel is for a business purpose
  • The employee has paid for fuel themselves
  • Costs have been reclaimed as a mileage expense

VAT can’t be claimed if:

  • Travel is non-business related
  • The company directly pays fuel on behalf of the employee

The employer can reclaim VAT on the mileage allowance payments using a set of approved fuel rates. The updated rates are available  here.

Overseas costs reclaim

The VAT on expenses incurred overseas can often be reclaimed. This will depend on the specific rules of the country’s jurisdiction.

These can depend on:

  • Type of business
  • Why the expense was incurred
  • Who was incurring the expense
  • Where your company is registered

For companies who frequently reimburse international travel costs, it’s an area that needs to be fully explored. It’s a task that many finance teams choose to outsource to specialist VAT recovery teams.

Providing proof

To reclaim VAT, you need to supply HMRC with valid supporting documentation. This means keeping records of:

  • All invoices you receive (originals or digital copies)
  • Name, address and VAT number of any self-billing suppliers
  • Debit or credit notes
  • Import and export records
  • Records of items you can’t reclaim VAT on, e.g. business entertainment

While it’s fine to keep digital copies of paper receipts or documents - it has to be an image of the original and shouldn’t say ‘duplicate’ or ‘copy’. Webexpenses allows paper receipts to be scanned with a smartphone app, using ACR technology to extract all of the information needed for compliance.