Occasionally your employees may spend money on business-related costs.
Vehicle rental, travel and hotel costs, or buying milk for the communal kitchen. Whatever it is, you need to pay back employee expenses.
Expenses are notoriously tricky to manage. Taxes, false claims, and rules on allowable expenses are all factors you need to keep in mind. And getting it wrong can leave either you or your staff out of pocket.
Read our guide to learn about claimable expenses for employees, as well as what your tax and reporting obligations are.
What is an employee expense?
When an employee needs to make a purchase because of their work, out of their own pocket, it’s considered an employee expense.
It’s the amount of money they might spend on goods and services. These expenses are costs which employers are normally required to reimburse – depending on the reasons for the purchase.
Some employee expenses can class as either business or personal. Under HMRC rules, you can test for employee business expense if it:
- Would have been incurred by whoever performs the task.
- Was necessary to carry out the task.
- Was needed during the task.
- Was incurred, and payment was made.
- Was “wholly and exclusively” for the specific task.
Anything that isn’t related to work is classed as non-business; like commuting to and from work.
What expenses can an employee claim?
Some of the most common allowable expenses for employees range from:
- Mileage rates for employees who use their own vehicles.
- Train, bus, taxi and air fares incurred.
- Charges such as parking, motorway tolls and congestion fees.
- Overnight accommodation.
- “Subsistence” costs, such as meals and drinks.
- “Incidental” expenses, such as phone calls.
How do employees claim expenses?
Businesses of all sizes and sectors should keep expense reports. The report can help employers track unscheduled business spending.
Expenses are mostly reimbursed by showing receipts and invoices; and are all documented in reports.
Your expense report should employee names and dates of expenditure. But also notes to clarify the purchase and how much costs were – including tax.
Conducting them monthly and annually is the best business practice for employee expense reports.
Monthly reports will help you regulate costs as you run your business. And annual reports help deal with taxes that need addressing.
Employee business expense forms are all mostly digitised, as many companies aim to use less paper and keep up with the latest technologies. Having an automatic expense report system in place leaves very little room for human error and potential fraud.
Claiming vehicle expenses
Having car mileage allowances can help you deal with things like; insurance, road tax, and fuel costs.
If someone needs to drive for part of their role, they can claim fuel expenses for employees. They should keep a record of dates, destinations, miles, and fuel costs for expenses reports and reimbursements.
Legal rules for employee expenses
Whatever costs raised by employees, business expense deductions must all be logged and reported.
Unless exempt, you must report your employees’ travel expenses to the HMRC.
There are certain taxes you need to pay, like national insurance and other legal obligations.
Employers should check whether they can reimburse certain travel expenses tax-free.
Claiming VAT on employee expenses
You may ask whether you can claim VAT on expenses raised by your employees. Business expense deductions that occur may be partial to this, but only in certain situations.
You can reclaim VAT on purchases up to a maximum of £150, as long as you have the necessary receipts or invoices. Any VAT reclaim requests you send to HMRC must be titled with your business name.
Employee expense report guidelines
Expense reporting guidelines should be documented in your business policy. The best way to manage these expenditures would be:
- Set out clear spending budgets: employees should be aware of where and how much spending is allowed.
- Have fair rules for all: no matter what level employees are at, you shouldn’t treat them differently regarding expenses.
- Simplify the process: Your policy and method for employee expenses should be clear and understood by all your staff. They should know what is required for reports, but also feel comfortable with the process.
- Comply with the law: It’s your responsibility to keep legally compliant whilst dealing with business expenses. That includes paying employees back, paying taxes, and what regulations need to be followed.
Many businesses supply a prepaid employee expense card for their staff. It’s normally a debit or credit card with a set amount of funds. That way the risk of overspending can be controlled and even minimised.
Get expert help on dealing with employee expenses
You should have a strong procedure in place for managing business expenditure; for yourself and for your employees.
Follow the legal rules for reimbursing and expenses will ensure your staff will understand how and when they will gain their money back. Which allows you to avoid negligence, court hearings, and penalties.
Demonstrate a clear procedure of your employees need to pay out if their own pocket whilst working for you.
Peninsula offers expert advice on managing employee pay, benefits, and expenses. Our expert HR consultants deal with all payment and financial queries and can build employment contracts that fit your business needs perfectly.
Get expert advice on employee expenses with our team today. Give us a call on 0800 028 2420.