A No-Nonsense Guide To Expense Management
The biggest danger posed by expenses is our attitude.
It’s the way organisations 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.
Taking control of your expenses
Over the past decade, the digital world has transformed the way we’re able to manage, monitor, and track expense reports. The old expense management processes, a breeding ground for expense fraud, have been replaced by efficient digital systems.
In this white paper, we will show how your organisation can fully embrace these changes by implementing expense management software. We'll provide an overview of the basic elements needed for an effective expense management solution, including:
- Knowledge - knowing how expenses work
- Policy - putting together an expenses policy
- Management - using the right tools for the job
Step one: Expenses knowledge
Expenses should be simple. An employee pays for a work-related item, keeps a record of the payment, then claims the amount back from their employer. The claim is checked and, if approved, it’s paid and the job is done!
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.
One of the challenges in calculating tax on employee expenses is interpreting what HMRC deems to be ‘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 that is also worn outside of work, would not. It’s this basic principle that 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
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 expenses and benefits amount is then recorded in a 911D(b) form. The deadline set by HMRC to receive all of these forms is July 6 each year.
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.
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.
HMRC uses the term Approved Mileage Allowance Payments (AMAPs) to describe those mileage expense payments that qualify as being tax-exempt.
The current rates they have set for AMAPs are:
So an employee who has driven their car 12,000 miles over the course of a year for business purposes would receive 45p per mile for the first 10,000 miles and 25p for the remaining 2,000.
Step two: Expenses policy
With basic knowledge about the way employee expenses work, you can begin applying this to the specific needs of your business. 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.
What form should an expense policy document take?
It doesn’t matter. It can be a paper document, on a company wiki, a digital doc on a shared folder or drive in the cloud, or all of these things.
What’s important is that your expense policy document is 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.
Your policy document can be integrated into your day-to-day operations using a cloud-based management system such as Webexpenses.