A practical guide to HMRC expenses compliance

Content from our United Kingdom office from our UK office

How to make your business tax compliant and VAT efficient

With the threat of fines, back payment of arrears and potential prosecution - compliance is one area of expense management you simply can’t afford to get wrong.

But while the pressures to meet external rules and regulations have increased, so has the power of digital expense management systems to effectively handle them.

This guide shows you how a digital system can help to relieve those regulatory pressures with a way to manage expenses which is HMRC tax compliant and VAT efficient, to ensure your organisation can survive an HMRC expenses audit.

A smarter way to handle tax

There are obvious benefits provided by switching from a paper-based to a digital expenses management system. It’s the difference between having to manually post a letter and zinging off an email - it’s faster, simpler and less expensive.

But there are other major advantages which, while being less obvious, are no less important. Amongst these is the power of a digital system to boost tax compliance and unlock VAT savings.

Compliance is something that businesses can’t afford to ignore with HM Revenue and Customs (HMRC) continuing to devote more resources towards ensuring businesses are tax compliant.

An inspector calls

Inspections can take place at any time with teams of officials authorised to take a forensic look through your business’s paperwork as they search for errors or potential fraud. With the threat of repayments, fines and prosecution, it can be an unsettling time for any business.

But the process is much less fraught when your expenses are managed by a digital system. This provides access to the type of accurate data that ticks all the required boxes for a tax inspection team.

It helps to protect your company from the risks of non-compliance while also providing you with all the accurate data and records required to reclaim every penny owed to you in VAT. So this guide will show you exactly how a digital expenses management system can help your company to achieve these two goals. How to:

• Ensure HMRC compliance
• Identify VAT savings

Ensure HMRC compliance

When HMRC carry out a company audit of expenses, they aren’t just going to burrow down into your company’s documentation, they will also take a look at the bigger picture. They want to see evidence that you have an effective end-to-end process in place to manage your employee expenses. This includes:

  • An enforceable expenses policy
  • An effective approvals process
  • A robust system of checks and balances
  • Appropriate documentation

These are all requirements that a digital expenses management system is ideally placed to handle.

Enforceable expenses policy

Every company should have an expenses policy, it provides a solid foundation on which to build an effective expenses management setup. It gives employees all the ground rules they need to know on what can and cannot be claimed.

HMRC will be particularly interested in seeing if your policy provides employees with clear guidance on business travel - how they should travel and what mileage reimbursement rates they will receive.

In the past, an expenses policy would be a static document, with employees having to seek it out for themselves. But with a digital system, it becomes an active part of employee workflow.

A system such as Webexpenses is able to monitor for policy rates and limits in real-time - notifying claimants whenever there’s a problem.

Effective approvals process

The process each claim goes through before it gets approved is something the HMRC will want to see evidence of. They need to see at what stage of the process checks are made and the seniority of those employees making them.

A digital system allows you to ‘hardwire’ these checks into your expenses management. As soon as a claim is made it can be forwarded to the right department for checks and approvals.

Robust checks and balances

HMRC want to know what specific checks are made to ensure each claim is compliant. This starts with a general check that all the correct procedures and protocols have been followed for each claim.

But the main checks that HMRC will want to see covered are those showing that:

• Costs are legitimate business expenses
• They are supported by valid and legible receipts
• Any mileage expenses are accurate

A digital system helps a finance team to make sure that each claim goes through the right system of checks and balances. It can be configured to automatically prevent any out-of-policy claim from being processed until it’s verified as being valid.

Appropriate documentation

It doesn’t matter how compliant an expenses regime is if you don’t have the accurate records required to prove it. HMRC want to be able to see the full ‘story’ of each claim made. This includes:

  • Who/what/where/when of claim
  • Why it’s being claimed
  • Associated receipts/documents
  • Who and how it was checked/approved

The HMRC requires company documentation to be kept for a period of six years from the end of the accounting period concerned. With a paper-based expenses management, this is a significant undertaking requiring years of paperwork and receipts to be physically stored.

With a digital system such as Webexpenses, a smartphone app is used to convert any paper receipts into a digital form. It allows all of the appropriate documentation to be generated automatically and stored digitally.

Identifying VAT savings

There’s no getting around it - managing VAT and employee expenses can be complex and confusing. In recent times, there have also been various changes to VAT legislation, prompting the question – is there still an opportunity to recover VAT?

And the answer is very simple: Yes!

Any VAT that’s charged on land or property related services, on conference or event organising activities, T&E, restaurant meals and subsistence – all normal types of expenses incurred by a business, can be recovered.

But confusion over how the system works means that huge amounts of VAT are left unrecovered each year. It’s difficult to quantify the exact amount as the relevant jurisdictions don’t publish these statistics but it’s comfortably in the billions.

Opportunities for foreign reclaim

Any companies who rely on international travel are paying this tax on all of their accommodation, meals, transport and incidentals. What they’re often not aware of, is that this VAT may be recoverable.

Complexity arises when trying to determine how each country treats the VAT with every jurisdiction having different rules. These can depend on the company type, why the expense was incurred, who was incurring the expense and where your company is registered.

The complexity of trying to estimate this kind of VAT recovery is the reason many organisations choose to engage a third party specialist to handle the task. Whether this is worthwhile can be determined with the following formula:

UK VAT Formula

Hotel spend is the largest VAT recoverable expense type and 20% is the average standard VAT rate across the EU. While this calculation will not give an exact recoverable amount, it can help determine if investigating Foreign VAT recovery is worthwhile for you.

VAT by category*

The ‘other’ category includes spend categories such as laundry, training, gifts, subscriptions, domestic air, equipment, visas, office supplies and books.

  • Lodging 57%
  • Meals 14.8%
  • Taxi 11.6%
  • Other 9.3%
  • Car Rental 3.9%
  • Conference 0.9%
  • Public transport 0.78%
  • Parking 0.7%
  • Fuel 0.5%
  • Tolls 0.2%

*Note: this profile is indicative based on the collective data of clients from our partner Meridian Global Services.

VAT recovery: Top tips for business travellers

Tax compliance experts, Meridian, give their expert tips on recovering foreign VAT.

  1. Original invoices are key – this means that when you get your receipt/ invoice, it should not say duplicate/copy. It should also show the date, suppliers’ name and VAT number.
  2. Book accommodation directly with the hotel - this avoids the issue of a non-VAT compliant invoice from an aggregator.
  3. Use your business address – when checking into a hotel, give your business card for the address details and explain that you need this address put on the invoice.
  4. When you are having a meal with colleagues or clients, write their initials on the back of the receipt before you leave the restaurant or shortly after - This way you won’t forget who attended which meal, particularly if you are travelling several times before submitting your expenses.
  5. If in doubt whether a receipt is eligible or not for VAT, keep it! - It can always be discarded later on!

Domestic VAT savings
A common area of confusion with VAT is whether a company can reclaim it on mileage claims. The simple answer is that you can, as long as it’s for a business purpose, the employee has paid for the fuel themselves and has reclaimed it as a mileage expense.

VAT can’t be claimed for any kind of non-business related travel or where a company directly pays the fuel costs on behalf of the employee.

For many companies, the traditional solution to avoid any kind of confusion has been not to reclaim any VAT on mileage claims. The obvious consequence of this is the potential to be losing out on valid VAT reimbursements.

It’s particularly important if the mileage rates you provide employees are different from those recommended by HMRC. They provide tax relief for the use of a vehicle with rates of '45p per mile for the first 10,000 business miles and 25p per mile thereafter'. If you pay a mileage rate lower than these rates then employees can obtain tax relief on the difference with a claim to HMRC. The employer can reclaim VAT on the mileage allowance payments using a set of approved fuel rates.

As of March 1, 2017, these are:

UK VAT mileage allowance chart

As an example, if an employee goes on a 200-mile business trip in a 1500cc car and they’re paid 30p per mile, the employee could make a claim to HMRC to deduct a £30 mileage allowance from their taxable pay. The employer could then recover VAT on the fuel element - a total of £4.33.

Taking control of tax

So with effective use of digital expenses management and some expert advice, you can make sure your company is tax compliant and VAT efficient. With a robust policy and meticulous record keeping, there’s no longer a need to live in fear of the dreaded tax inspection.

But that doesn’t mean you should become complacent. Any expenses system is only as good as the people who maintain it and all employees need to be fully aware of their shared responsibility to ensure compliance.


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