There are no quick fixes when it comes to employee expenses and tax compliance. The simplest, safest and most effective approach is to understand exactly what information HMRC requires from your company and...to give it to them.
To do this requires some basic knowledge, an efficient expense management setup and the right mindset. Effective compliance has to become the default state - not something that you start to worry about when a letter from HMRC drops on your company doorstep.
This two-part guide will help you handle the compliance challenge; to minimise the risks of compliance breaches and to maximise your tax efficiency. First, we’ll look at how to create a compliant expense system.
Understanding what HMRC wants
During all interactions with HMRC, they will be assessing your business’s ability to effectively manage and monitor expense reimbursements.
Tax inspectors won’t just focus on accounts, they’re also looking at the bigger picture. They gauge the quality of the information that you provide, referred to as the ‘quality of disclosure’.
They need to know that you have a system that’s properly monitoring reimbursements and ensures that costs are accurate and legitimate. This requires:
- An enforceable policy
- Effective approvals processes
- Robust checks and balances
- Meticulous documentation/records
Here’s an overview of each area:
The foundation for any compliant system is a robust policy document. This gives employees the ground rules, setting out which costs can and can’t be claimed - along with the processes in place to do so.
HMRC will look to see that a policy is properly maintained and updated to meet any changes to compliance legislation. They will also want to see evidence that policy rules are clearly being communicated to employees.
This is an area where cloud-based systems provide a major advantage. Instead of relying on a static document - finance teams can deliver real-time policy checks and reminders via on-screen messages.
Each of these checks is digitally stored, providing a digital log that demonstrates to HMRC that proper compliance procedures are being carried out.
You can find a guide on how to create an effective expense policy [LINK: https://www.webexpenses.com/en-gb/resource/how-to-create-an-effective-expenses-policy-uk?utm_source=HMRCToolkit&utm_medium=Email1&utm_campaign=HMRC] here [END LINK]
A compliant expense system needs to have a clear and consistent ‘chain of command’ - a defined process to show how each expense claim is handled. You will need to be able to provide information which shows:
- Approvals workflow - who checks what and when?
- The seniority of approvers - do they have sufficient knowledge?
A benefit of working with a digital system is that each of these steps will be automatically logged as costs are being processed - including the identity of approvers and a timestamp of when a cost is approved/rejected.
Robust Checks and Balances
A 2017 global survey of more than 4,000 employees found that 84% of claimants have never had an expense claim challenged or declined. It helps to explain how expense fraud has become such an endemic problem.
So tax auditors want to see evidence of your business having robust mechanisms in place to
root out any illegitimate costs that are submitted. This includes claims which are:
To monitor these areas, each cost must be supported by documentation - a receipt or transaction record. These need to be checked and verified by finance professionals.
With a digital system, automated checks can be carried out with alerts being triggered whenever a submitted cost breaches any predefined levels.
An important aspect of compliance to understand is that simply having an effective system isn’t good enough - you also need to be able to prove it.
What sets alarm bells ringing for HMRC is any lack of information - suspiciously vague areas of accounts or missing documentation. They want to be able to clearly follow the ‘journey’ of each expense - from submission to reimbursement.
Even if discrepancies are found, providing accurate and detailed documentation provides them with the reassurance that reasonable steps have been taken to ensure compliance.
Providing this level of documentation used to be a daunting and task but it’s now something that can be easily accomplished with a cloud-based expense system.
A system such as Webexpenses automatically generates and collates data on every aspect of expense operations. This information is easily accessible via integrated reporting tools.