The Importance of a Business Expenses Policy
Monday October 5, 2015
A solid grip on your business expenses is about more than keeping your costs down. With the right approach, it can boost every aspect of your business.
So, you sent your top three operatives out in pursuit of that pesky secret agent who keeps sneaking into Fortress Steelskull and making off with those Etheric De-atomiser blueprints you'd had printed up so nicely. Now those operatives are back, and not only did the target they were chasing turn out to be an auto-destructing clone in disguise, but they're also complaining that they've had to buy three more vials of stonefish venom and replacement brims for their steel-lined bowler hats. Sounds familiar, right? Then you need a clearly defined business expenses policy!
Why do I need an expenses policy?
A properly implemented policy can save you valuable time and serious money. It can protect against fraud and legal problems, and can smooth things out if you get randomly audited by HMRC. Here's what you need to know right now:
- Over £100 million is being lost each year by UK companies as a result of falsified and exaggerated claims.
- An unclear or incomplete view of money going out in expenses can severely threaten small business cash flow.
- Allowing employees to claim for the wrong things could easily see you on the wrong side of HMRC.
- There may be tax or other benefits to purchasing certain goods and services in a particular way, and your employees should be aware of this to avoid wasting money.
- Cloud-based accounting tools now make it much easier to efficiently monitor and maintain your expenses policy, and keep in control of your day-to-day business costs.
Don't assume you can claim for something just because others can. A lot depends on your circumstances and industry, and you need to stay up-to-date. The law changes often, so talk to RIFT Accounting for the full picture.
The most effective way to approach an expenses policy is to go back to basics and ask some fundamental questions:
What is an expenses policy?
- Conceptually, it's the foundation on which effective expenses management is built. Practically, it's a document outlining how you handle those expenses.
- It gives employees guidance on what can and can’t be claimed for.
- It's a guide to the process of making claims and handling disputes over expenses
How can I make my policy effective?
Here's a quick checklist to follow when creating your policy:
- Strive for fairness. The best policies are those that employees see as fundamentally fair. You'll never see eye-to-eye on every little detail, but if they accept that you're being fair and transparent you'll have far fewer problems.
- Keep it simple. A dense document full of needless legal jargon will just be misunderstood or ignored. Include examples and illustrations. Don’t be afraid to use your own voice and stick to the information needed.
- Keep it up-to-date. Many companies choose to use a Google Doc or internal WIKI that can be easily accessed and updated. Don't just post it up and forget about it. An effective policy should be reviewed and revised every few months to account for price inflation, legislation updates and technological advances.
- Get your employees involved. Giving people input into creating or revamping your expenses policy means they're more likely to stick to the rules.
- Make sure your employees know their spending limits and how to record them. Help them keep on top of compliance issues for your industry, along with any preferred suppliers and rules about the types of expenditure covered.
- If you provide company cars, you need specific rules on mileage allowance, fines for traffic offences, maintenance or valet costs and so on.
- If you have employees who work outside the office, remember their costs for mobile phones, computers and other technology. What happens in the case of loss or breakage?
- If your employees need particular clothing or equipment, you'll need to be clear on whether it'll be supplied directly or if they should purchase it themselves.
How does an expenses policy help my employees?
- It provides clear guidelines on compensating them for personal expenses for business reasons.
- It prevents expenses from developing into a breeding ground for low morale, discontentment and exaggerated claims.
- Without an effective policy, you're open to spiralling costs and legal risks.
A 2014 survey found that a shocking 43% of employees felt an unfair company expenses policy justified them making fraudulent claims. On top of the unexpected costs, this could also mean legal trouble. With a solid, fair policy in place, everyone knows exactly where they stand. Obviously, it's always a good idea to make sure your employees check with you before spending money if they aren't sure if it qualifies.
How can I make sure my expenses policy works for me?
You need to make sure your policy:
- Is clearly written and can be understood.
- Is fair and transparent in how expenses are defined.
- Demonstrates how expense claims are to be recorded and submitted, and how and when reimbursement will be made.
- Explains who employees should talk to if they have questions.
- Explains what happens if expenses aren't submitted correctly. For example, not supplying any required receipts, sending the claim by email instead of using the system provided or missing the cut-off date.
Are there other benefits to having an expenses policy?
- It's always worth having a solid expenses policy to show to possible investors or partners. It's a clear signal that your business is efficient and well run, that you take your obligations to employees seriously and that your record keeping is first rate.
- Research suggests that an effective expenses policy reduces an organisation’s transport and entertainment costs by up to 20%.
- When employees understand the reasons behind company policies they're more likely to offer constructive suggestions, helping you find ways to improve your business.
How does an expenses policy help with legal compliance?
Under the general tax law, expense payments count as “taxable remuneration”. A taxpayer can claim a deduction for “expenses incurred wholly, exclusively and necessarily in the performance of duties of the employment.”
To keep on good terms with HMRC, your expenses policy can help you make sure that:
- All expense claims are accompanied by original receipts, invoices or similar.
- Credit card items are accompanied by an itemised receipt giving full details of VAT numbers and amounts.
If your company is VAT registered and you want to claim back VAT costs, you must have original receipts to accompany allowable claims. To meet the HMRC requirement, each receipt or invoice should list:
- Your VAT registration number.
- A description of the goods or services supplied.
- The total charge, including VAT.
- The name and address of the supplier.
- The date of supply.
In a recent poll of accountants who work with micro-business clients, more than half of respondents (53%) said that expenses was the most common area where these clients made mistakes in their accounts.
It can be a struggle for many micro-businesses to understand what they can and cannot claim. Around 29% of accountants said claiming for expenses they weren't entitled to was the area where micro-businesses made the most mistakes. However, 24% said the biggest area for mistakes was micro-business owners failing to claim back expenses that actually were permissible.
That's a bird's-eye view of business expenses policies and why you should be using one. There's a lot more ground to cover and some fine details to go over, so make sure you talk to RIFT Accounting to get the best out of your business.
With us at your side, those Etheric De-atomiser blueprints have never been in safer hands, so keep checking back here for more Voices From the RIFT...