A practical guide to managing your company's expenses
Time for change
The biggest danger posed by expenses is our attitude.
It’s the way organizations allow expense reports to be something to dread and avoid. How they become the business equivalent of a dripping tap - a problem you learn to live with.
But our attitude towards expenses is a relic from a bygone business age.
Over the past decade, the digital world has transformed the way we’re able to manage and monitor expense reports. The old processes, a breeding ground for expenses fraud, have been replaced by efficient digital systems.
The purpose of this guide is to show how your organization can fully embrace these changes by implementing an expenses management solution.
Taking control of your expenses
This guide is based on more than a decade’s worth of experience that Webexpenses has in helping companies to regain control of their expenses. The three-part guide aims to provide an overview of the basic elements needed for effective expense management:
- Knowledge - knowing how expenses work
- Policy - putting together an expenses policy
- Management - using the right tools for the job
To cover all aspects of expense management would take a library rather than a single document. We have therefore honed the information down to the most common questions we get asked.
Step one: Expenses knowledge
Expenses should be simple. An employee pays for a work-related item, they keep a record of the payment and then claim the amount back from their employer. The claim is checked and if approved; it’s paid and job is done!
And if all businesses operated in isolation, it would be that simple. But, of course - they don’t and most of the complexity and confusion surrounding expenses comes from the way they integrate into a wider business and legislative world.
The first step to effective expense management is, therefore, getting a grasp of how this works. The purpose of this section is to tackle some of the most common questions and concerns.
How do I work out which employee expenses are taxed?
It’s simple - all legitimate business expenses are tax-free.
Well, okay - that’s obviously way too simple for anything involving the tax system but it’s a good place to start.
The fun and games are trying to interpret/guess what the HMRC regards as being ‘legitimate business expenses’. Here’s the exact wording they use: An employee may deduct expenses incurred wholly, exclusively and necessarily in performing their duties.
So an expense claim for a protective overall worn only on-site would be acceptable. A claim for a business suit which is also worn outside of work, would not. It’s this basic principle which can be applied to the tax status of all employee expenses.
- Is it required for a work purpose?
- Are there any outside benefits?
There will always be grey areas when trying to apply this rule but, for the most part, we can use it as a general guide to deciding what is and isn’t accepted.
The most common kinds of expenses accepted by HMRC are:
- Accommodation and subsistence
- Business travel or fuel
- Professional fees and subscriptions
- Tools and specialist clothing
- Capital allowances
- Household expenses when working at home
What information does HMRC need concerning expense payments?
At the end of each tax year you need to supply payroll information for each employee you have paid expenses or benefits to.
If they earn more than £8,500, this will be via a P11D form and for those less, it’s a P9D.
The total amount of expenses and benefits is then recorded in the clunkily named 911D(b) form. The deadline set by HMRC to receive all of these forms is July 6th. You can, however, apply to HMRC for a Dispensation Agreement. This removes the reporting requirements for certain types of expenses. Once granted, these apply indefinitely.
You can find form copies and more information on the HMRC website.
Are staff parties and corporate events tax-deductible?
This depends on them meeting the HMRC’s strict rules for special events. It qualifies as being tax-deductible only if:
- It’s an annual event such as an end-of-year party
- The event is open to all employees
- The cost per head of the event is no more than £150
If any of these requirements are not met then the entire cost of the event will become taxable. But as long as you tick these boxes, you’ll have no tax to pay and no reporting requirements. There’s also a certain amount of wiggle room within the rules. If your company has different offices or departments, for instance, you can hold an event which caters for all employees at a particular site.
You can also split the cost per head over more than one event. So you could hold two events where the overall cost per head is £75 and both would qualify as tax exempt.
What rate should a company set for mileage?
You can decide whatever rate you want but you would be advised to stick to the payment levels recommended by HMRC. By following their mileage rates, you ensure any payments remain tax-free while saving your finance team a major amount of extra hassle.
The HMRC uses the term Approved Mileage Allowance Payments (AMAPs) to describe those mileage expense payments which qualify as being tax exempt.
The current rates they have set for AMAPs are:
So an employee driving his car 12,000 miles during a year for business purposes would receive 45p per mile for the first 10,000 mile and 25p for the remaining 2,000.
If you stay within these levels during a tax year then you have no tax to pay and no reporting requirements. Employee travel which qualifies as being a legitimate business expense in HMRC terms is classed as those journeys that 1. Form part of an employee’s work duties and 2. Are for attendance at a temporary workplace.
Should mileage claims always be made for the shortest distance?
Not necessarily. Although we now have GPS technology to give us the precise distance of a journey; there needs to be some room for flexibility. This is because the focus should be on the most efficient route rather than the shortest distance.
A good GPS system will provide directions based on traffic flow and likelihood of delays along various routes. With tools such as the Webexpenses’ mileage tracker, employees are able to record the exact route taken with explanatory notes attached to explain the choice of route.
Can I reclaim VAT on travel expenses?
Yes, you can. But as usual with HMRC, there are a few hoops that have to be safely jumped through before you qualify. The general rule is that you can reclaim VAT on things such as travel, meals and accommodation if you pay all or some of the costs. The other rule is that you can’t reclaim VAT if you’re also paying employees a flat rate to cover these kinds of subsistence costs.
Care has to be taken to ensure you’re only claiming for people who are accepted as employees in the eyes of HMRC. This means they must either be:
- Directly employed by your company
- A director, manager of the business
- Helpers or stewards - people essential to the running of an event
So shareholders would not be eligible and neither would people attending job interviews.
Step two: Expenses policy
With basic knowledge about the way expenses work, you can begin applying this to the specific needs of your organisation. The foundation for this is a robust and effective expenses policy. This sets out the way your company handles expenses - what can be claimed, how it can be claimed and any specific rules or compliance regulations.
An expense policy needs to be continually revised and updated to make sure it adapts to any changes, both internally and within the wider legislative world.
You can find a full Webexpenses’ guide to creating an effective expenses policy here. But here we are going to deal with the most common questions asked about planning and policy.
Do we need an expenses policy?
The simple answer is: yes. It’s not possible to effectively manage expenses without the foundation of an expenses policy. Another reason is that the HMRC demands it. Or at least, they strongly recommend all UK businesses to have in place a policy for compliance purposes.
One of the safeguards against prosecution under the 2010 Bribery Act is that you have an expenses policy in place which monitors and records all expense payments.
But it’s wrong to think of it as a niggly task you are required to do. The bottom line is that you need an effective policy because it will help to:
- Save money and reduce wastage
- Maintain good employee morale and staff retention
- Safeguard your company from legal risks
It can make the difference between a cost-effective, growing company and a floundering business.
Is a strict expenses policy more effective than a relaxed one?
It’s not the right way to approach this. It doesn’t matter how harsh or fair policy is if it’s not effectively implemented and managed. But generally, the most effective policies are those perceived by employees to be reasonable and fair. They don’t have to necessarily agree with the rules and limits but they should accept them as being legitimate.
It’s a question of finding a ‘sweet spot’ between an overly officious policy which is likely to cause staff resentment and a needlessly slack policy which leaves your organisation open to fraud and non-compliance issues. The ideal policy is one which operates in the style of a world-class soccer referee - it’s ever-present and all-seeing but barely noticed. It’s robust and authoritative while being fair and reasonable.
What form should an expenses policy document take?
It doesn’t matter. It can be a paper document or on a company wiki or a doc on a shared folder or drive. Or it could be all of these things. What’s important is that it’s easily accessible. And this is not just in terms of employees being able to find it, but also in terms of the way it’s written and presented.
You want employees to be able to absorb and understand the information without requiring them to wade through pages of overly dry and officious text.
But as we will show in part three of this guide; your policy document can be integrated into your day-to-day operations using a cloud-based management system such as Webexpenses.
Step three: Expenses management
Now you have a plan - you just need to make it happen. In the past, maintaining an expenses policy was a constant battle - one which many ended up losing. It was a case of a finance team having to trawl through mountains of paperwork to make sure all claims stayed within policy.
It was a mainly reactive system which accepted that expenses fiddling would take place and left it to the wiles of the finance department to root the ‘fiddlers’ out.
Now, however, we have cloud-based management tools which allow your policy to become a seamless part of your work culture with compliance ensured at the point of use.
As well as being more efficient, they provide a more cost-effective way of managing expenses. By converting paper receipts into digital form, processing time can be reduced by around 25%. Below are some of the most common questions asked about expense management.
What is meant by ‘cloud-based’ expense management?
The cloud means this data can be loaded and saved from a server anywhere in the world. So cloud-based expenses management means you can access the tools you need from anywhere with an online connection.
Cloud-based expense management therefore provides businesses with a powerful way to manage and monitor their expenses. Paper receipts are converted into digital form to drastically reduce processing time.
What are the advantages of using a cloud-based system?
In terms of general efficiency, it’s the difference between handwriting and posting a letter to typing and sending an email. It provides a much faster, more efficient and powerful way to manage expenses. Moving from an old paper-based process to a digital system reduces processing time and provides much greater flexibility.
The main advantages of a cloud-based system are:
The Webexpenses service is proven to reduce the processing time by around 25%.
Configures to meet the specific needs of each organisation - no matter how complex.
Business travel mileage tracked and recorded to meter accuracy using GPS technology.
Expenses data integrates seamlessly with existing payroll software.
A rich stream of data helps to monitor the efficiency of expenses policy.
How do paper receipts become digital?
This is done using the Webexpenses app. This allows an employee to use the camera function of a smartphone or tablet device to take a picture of the paper receipt.
This digital image can is attached to their claim and can be instantly uploaded to the user’s account, along with any additional information required. It means that users can upload a claim at the point of payment - whether they’re stood in a hotel reception or sat in a restaurant.
Do I need to keep copies of paper receipts?
No. You need to keep a copy of any receipts that are included in P11D or P9D submissions to HMRC but there’s no reason why these should be kept as paper originals.
Records may be preserved on optical imaging systems, and the originals discarded, provided that what is retained in digital form represents a complete and unaltered image of the underlying paper document.
So scanned digital images are fine, as long as you make sure they’re legible. The HMRC advise that expenses records are stored for three complete tax years after the period they relate to.