How to Stay Safe from HMRC
15 September 17 | By: Jas Jhooty
From 2016/17 employers no longer require a HMRC dispensation to leave reimbursed business expenses off P11D forms.
However, one of the main consequences of this relaxation of the rules is for employers to ensure that they only reimburse legitimate business expenses to their employees. To this end having an up-to-date expenses policy is absolutely essential.
An effective expenses policy should cover the majority of the different types of expense which can be claimed by an employee. The expenses policy should include cross-references to any codes of conduct in force for employees. Most companies will have particular rules on particular classes of travel or activities which are specifically excluded from being reimbursed.
Tax consequences should be considered as the expenses policy is developed. The vast majority of expenses reimbursed should be allowable for tax purposes. However it is worth remembering that some items can be subject to HMRC concessions, e.g. certain items which would on first appearance seem taxable can be included within an expenses policy, as long as the tax position is made clear.
Full explanations of how the business deals with common problem areas e.g. allowable business travel and staff/business entertaining, must be included to keep the employer safe from HMRC’s increased scrutiny in this area.
The policy should also consider the different methods by which an employee can incur expenditure. If there is a company credit card, then its use should be included in the policy.
The policy should also outline the method for reclaiming expenses, the process and controls that are in place regarding authorisation as well as outlining any specific receipt requirements to deal with, eg VAT reclaims by the tax / finance department within the organisation.
While the development of an expenses policy should not be an all-consuming task, there will be a number of interested stakeholders within the company. Where appropriate, there may be input from finance, tax, HR, legal and other internal regulatory functions such as internal audit who may have to review claims.
Expense claim forms can come in numerous formats. Typically, manual, spreadsheet-based and electronic forms are used by businesses depending on their needs. Whatever the format the expense claim form should reflect the categories of expenses within the expenses policy.
Clear guidance on the correct allocation of expenses should be available. As there are tax consequences to entertaining versus subsistence and staff entertaining versus client entertaining, the claim form must separate these out reflecting the expenses policy.
The use of a ‘general expenses’ or ‘sundry’ category of expenses should be kept to an absolute minimum. These are difficult to substantiate and attract scrutiny from HMRC with regards to their underlying purpose.
The abuse of expenses gives rise to not only tax issues but also other financial consequences. The expenses policy should include clear guidelines on reviews and approvals.
Sample audits are a good consideration. These audits provide financial confidence that the systems, processes and controls in place ensure that only appropriate expenses are being reimbursed. It should also help to identify any potential issues, eg the miscoding of expenditure which may give rise to tax consequences. If a business carries out these sample audits it also demonstrates that the employer is taking reasonable care should any errors be identified by HMRC.
In an effort to increase the yields from their employer compliance resource, HMRC routinely ask to see copies of employers’ expenses policies to see how up-to-date and thorough they are. If common problem areas such as effective business travel rules, business mileage collation etc. are not covered in sufficient detail, HMRC automatically assumes that mistakes are being made and those employers will be much more likely to be facing a full blown Employer Compliance Review.
Our consultants are experts in designing bespoke expenses policies tailored to fit the individual needs of your organisation. Our policies are robust enough to stand up to any HMRC interrogation and have been proven to provide protection against unwanted HMRC enquiries.
Please do not hesitate to contact us if you require any more information on how we can help to keep your organisation safe from HMRC.