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Are your expenses records up to scratch?
25 February 14 | By: Jas Jhooty
Every business has to pay their employees expenses in order to operate. Employers must ensure that they have an effective expenses policy that will help them keep control of their costs and that also adheres to tax and NIC legislation. Many businesses have poor controls that can lead to spiralling costs, extremely punitive measures being taken by HMRC when they conduct Employer Compliance Reviews, and even employee fraud.
With HMRC being tasked to double their compliance yields over the next three years, this week we take a closer look at the common danger signs that will indicate to HMRC that an organisation has lax expenses procedures.
You need to be able to prove that the expenditure you are reimbursing relates to business and is in accordance with your expenses policy. To do this the actual VAT receipt is required that provides a breakdown of the various elements included in a particular bill. Very often employees only provide the payment acknowledgement slip that does not show any detail, just the total amount paid.E.g. an employee attaches an acknowledgement slip for a restaurant bill totalling £75.00 without the VAT receipt showing a breakdown of what food and drink was actually ordered. By itself this slip cannot confirm: -
- how many people were in attendance,
- whether the bill relates to staff or business entertainment
- if it relates to subsistence
- how much alcohol was consumed
This lack of supporting evidence will lead to protracted lines of enquiry being raised by HMRC when they inspect your records.
Examining mileage records in great detail will be the favourite activity of the taxman at the time of your next Employer Compliance Review. This is because the repercussions of not keeping mileage records in enough detail will quickly result in a massive settlement figure for you to pay. Common problem areas include: -
- Inadequate journey details
- Mileage rounding
- Ordinary commuting reimbursements
This article on mileage records contains more detailed information of the problem areas surrounding mileage collation.
Most employees are under the misapprehension that all entertainment costs can be reimbursed tax-free (to them anyway!) Unfortunately this isn’t true. Your expenses policy needs to make clear to employees the repercussions of entertaining staff. Instances where you may provide staff refreshments (other than tea or coffee) should be viewed as staff entertainment. These can include business lunches, team meetings held every Friday at the local pub etc. Your expenses claim form needs to be able to identify such costs and if you are aware of such costs being incurred you should make sure you account for the tax & NIC due on your annual PAYE Settlement Agreement to avoid entries being required to be returned on individual employees’ P11Ds.
HMRC don’t like employees to have any fun and have some quite peculiar notions on the allowable consumption of alcohol with meals whilst an employee is away on business. HMRC commonly insist that the rules contained in their own internal expenses guidelines relating to alcohol consumption should be applied to all organisations (despite there being no basis for this assumption in law!)
What the HMRC internal guidelines allow is up to two alcoholic drinks with a sit-down evening restaurant meal. Any drinks taken at the bar or out of a mini-bar are deemed to be taxable (subject to £5/£10 Incidental Overnight Expenses limit).
Again it is extremely common for employees to claim the full amount of everything shown on their hotel bills. However these should be split between room costs, subsistence costs and Incidental Overnight Expenses costs e.g.
- Mini bar
- Bar drinks
- Phone calls home
These should be analysed separately to ensure that the Incidental Overnight Expenses limits are not being exceeded. If these limits have been exceeded then the whole amount becomes taxable and not just the excess.
Employers should also make sure that they can identify any costs relating to reimbursements for overnight accommodation near an employee’s permanent place of work as these are taxable, (unless arranged for as a result of any industrial action having occurred preventing the employee from travelling home.)
It is imperative that a sample of your monthly expenses claims is checked thoroughly against the guidelines contained in your expenses policy. A register should be kept of those claims that were checked as this will prove to be invaluable when you are arguing that a HMRC spotted error is the exception rather than the norm.
If errors are found the expenses form should be returned to the countersigning line manager for them to inform the claimant of where the claimant has gone wrong. If errors persist either stronger action is taken against the claimant to ensure the message gets through, or the expenses procedures are modified to prevent errors occurring again. This robust feedback mechanism is a new requirement for Senior Accounting Officers wishing to continue to return unqualified annual certificates.
How emTax can help
emTax consultants are all ex-HMRC Inspectors and can review your current expenses policies and procedures, normally as part of a general PAYE Healthcheck.
We are currently offering a free employment tax advisory visit where one of our consultant’s will visit your offices to run through our PAYE & NIC Audit questionnaire to assess the level of risk you may be facing.
If you interested in this free visit, please do not hesitate to contact us.