A Guide to Expense Compliance in the UK

HMRC scrutiny isn’t getting lighter. And for many finance leaders, the real concern isn’t whether an enquiry will happen. It’s whether their processes would stand up to one.

And maybe that’s partly because expense compliance in the UK is complex, and can be time-consuming. But the trick is having a robust policy in place to make staying compliant just that little bit easier.

Now before you can create your company expense policy, and implement processes for complying with HMRC, you need to know what’s expected of you.

Let’s shine some light on the expense compliance areas to focus on to make sure you keep the taxman at bay. 

What do HMRC expect from you?

If you have an HMRC compliance check, they’ll review your entire expense compliance process for non-compliance with HMRC expense regulations.  
 
Their primary focus is to make sure that you have:  
 
• A clear and enforced policy  
• Appropriate approval processes  
• Comprehensive documentation  
• Appropriate checks and controls  
• Full compliance with Tax and VAT requirements  
• A robust and secure payment process

The VAT rates in the UK

VAT (or Value Added Tax) is a tax added to the price of most goods and services in the UK.

If you’re a business owner, you’ll need to register for VAT if your taxable turnover exceeds £90,000 in a 12-month period. 

Once registered, you’ll charge VAT on your sales and reclaim the VAT you’ve paid on your purchases.  

Here are the VAT rates for 2026: 

	% of VAT	What the rate applies to
Standard rate	20	Most goods and services
Reduced rate	5	Some goods and services, e.g. children’s car seats and home energy
Zero rate	0	Zero-rated goods and services, e.g. most food and children’s clothes

Zero-rated vs exempt: what’s the difference?

Not all goods and services are treated the same for VAT.

• Zero-rated items are still taxable, but at 0%. You must record them on your VAT return and can usually reclaim VAT on related costs.
• Exempt items are not subject to VAT. You do not charge VAT, and you generally cannot reclaim VAT on costs related to these activities.

When you mustn’t charge VAT

There are certain goods and services that are exempt from VAT. This means you won’t charge VAT on these items—even if you’re VAT-registered.

Some examples of VAT-exempt items include:

• Financial services: banking, insurance, investments. 
• Healthcare and medical treatments: doctor’s visits, prescriptions. 
• Education and training: school fees, university tuition. 
• Charity services: charitable donations, fundraising events. 

You can also access HMRC’s full list of VAT exempt goods. 

Remember, even though you don’t charge VAT on these items, you still need to keep track of them in your business records. 

Expense compliance when it comes to vehicle mileage 

Did you know that your employees can claim back time spent traveling for work? 

That’s right, by following HMRC’s mileage rates, you can empower your employees to claim back vehicle expenses incurred for business purposes.

Here are the mileage allowance rates for 2026:

Type of vehicle	10,000 miles	10,000 + miles
Cars and vans	45p	25p
Motorcycles	24p	24p
Bikes	20p	20p

 What are HMRC’s advisory fuel rates?

HMRC’s advisory fuel rates apply to company-owned cars and serve two main purposes:

1. Reimbursing your employees for business travel expenses incurred in a company car.  
2. Managing reimbursements when your employees use a company car for personal travel and need to repay the business.  

Here are the advisory fuel rates for 2026:

Petrol

Engine size (cc)	Mean MPG	Fuel price (per litre)	Fuel price (per gallon)	Rate per mile	Advisory fuel rate
Up to 1400	50.7	132.0 pence	600.1 pence	11.8 pence	12 pence
1401 to 2000	42.8	132.0 pence	600.1 pence	14.0 pence	14 pence
Over 2000	27.2	132.0 pence	600.1 pence	22.1 pence	22 pence

Diesel

Engine size (cc)	Mean MPG	Fuel price (per litre)	Fuel price (per gallon)	Rate per mile	Advisory fuel rate
Up to 1600	55.7	141.3 pence	642.2 pence	11.5 pence	12 pence
1601 to 2000	49.6	141.3 pence	642.2 pence	13.0 pence	13 pence
Over 2000	36.6	141.3 pence	642.2 pence	17.5 pence	18 pence

LPG (Liquefied Petroleum Gas) 

Engine size (cc)	Mean MPG	Fuel price (per litre)	Fuel price (per gallon)	Rate per mile	Advisory fuel rate
Up to 1400	40.6	89.0 pence	404.6 pence	10.0 pence	10 pence
1401 to 2000	34.2	89.0 pence	404.6 pence	11.8 pence	12 pence
Over 2000	21.7	89.0 pence	404.6 pence	18.6 pence	19 pence

Electric

From 1 March 2026, the advisory electric rates for fully electric cars are:

• 7 pence per mile for home charging
• 15 pence per mile for public charging

Charging location	Electrical efficiency (miles per kWh)	Electricity cost (per kWh)	Rate per mile	Advisory electric rate
Home charger	3.59	26.10 pence	7.26 pence	7 pence
Public charger	3.59	54.00 pence	15.02 pence	15 pence

 

How to reclaim VAT on fuel

If you’re VAT-registered, you can often reclaim the VAT you’ve paid on fuel costs. However, there are a few conditions:

• Business use: the fuel must be used for business purposes. This could be for company vehicles or employee reimbursements for business mileage.
• Accurate records: you’ll need to keep detailed records of your fuel purchases, including receipts and mileage logs. 

There are two ways you can reclaim VAT on fuel:

• Reclaim all the VAT paid on fuel purchases and pay the appropriate fuel scale charge for your vehicle.  
• Claim VAT only for the fuel used during business trips by maintaining thorough mileage records to demonstrate usage exclusively for business purposes.  

Expense compliance around carbon reporting

Business sustainability is a growing priority in 2026. From reducing carbon emissions to managing sustainable business spend, organisations are under increasing pressure to demonstrate measurable progress backed by reliable data.

In the UK, certain organisations are required to report their energy use and carbon emissions under Streamlined Energy and Carbon Reporting (SECR). This applies to quoted companies, as well as large unquoted companies and LLPs that meet at least two of the following criteria: 250 or more employees, £36 million or more in turnover, or an £18 million balance sheet total.

Where in scope, organisations are required to:

• Track their carbon footprint by reporting Scope 1 (direct emissions) and Scope 2 (purchased energy) emissions
• Disclose energy usage and include an intensity metric to measure performance over time
• Provide narrative on energy efficiency actions taken during the reporting period

Many organisations also go further by assessing Scope 3 emissions across their supply chain and setting reduction targets, particularly where ESG reporting is a priority.

What you need to know about tax compliance 

When it comes to tax compliance, we know the number one question on your mind: are reimbursed expenses taxable in the UK? 
 
The short answer is no. If expenses are wholly, exclusively, and necessarily incurred in the performance of your job, they aren’t taxable. 
 
For example, if you’re a salesperson and your job requires you to travel to meet with clients. Any expenses you incur, such as travel costs, accommodation, and meal expenses, can usually be reimbursed tax-free. Are there any exceptions? Yes, if the expenses aren’t classed as “work-related”, or if they’re seen as providing a personal benefit. 
 
Here are a couple of examples:   

• Excessive or extravagant expenses: if your expenses are deemed unreasonable or excessive, they may be considered taxable income.  
• Personal expenses: reimbursements for personal expenses, such as commuting to and from work, are generally taxable. 

We know it can be tricky, but knowing the difference between deductible and non-deductible expenses can significantly impact your financial planning and tax liability.  What you need to know about corporation taxIf you’re setting up a limited company in the UK, you’ll need to register for corporation tax within three months of starting your business. This tax is applied to your company’s profits, investments, and any gains from selling assets.Here’s a breakdown of the 2026 rates:

• Small profits rate (companies with profits under £50,000): 19%
• Main rate (companies with profits over £250,000): 25%

What you need to know about National Insurance Contributions 

National Insurance Contributions (NICs) are essentially taxes on earnings that help fund state benefits like the NHS and State Pension. If you’re a business owner in the UK, you’ll need to understand the different types of NICs and how they apply to your business:

Class 1 NICs

• Employee NICs: deducted from your employees’ wages. 
• Employer NICs: paid by you, on top of your employees’ wages.

Class 1A NICs

Class 1A NICs are a type of tax that you pay on certain benefits you provide to your employees.

These benefits, often called “Benefits in Kind (BIK)” can include things like:   

• Company cars: if you provide your employees with company cars, you’ll need to pay Class 1A NICs on the benefit value of the car.  
• Private healthcare: if you offer private health insurance to your employees, you’ll also need to pay Class 1A NICs on the cost of the insurance.  
• Accommodation: if you provide accommodation for your employees, such as a company flat or house, you’ll need to pay Class 1A NICs on the benefit value of the accommodation. 

Why you need to create an expense policy 

A company expense policy is like a roadmap to expense compliance. It outlines what expenses are reimbursable, how much you can claim, and what documentation you need to provide (for your company or HMRC). By having a clear and concise policy in place, you can make sure that your employees understand the rules and submit accurate expense claims. To help you get started you can download our free expense policy template. 

How to report your expense reimbursements to HMRC

You have a couple of options to choose from when reporting the reimbursement of expenses: 

• You can use a P11D form to report your expenses and benefits to HMRC at the end of the tax year. 
• You can opt for payrolling, where you include the value of the expenses and benefits in the employee’s pay.  

It’s worth noting that starting from April 2027, all BIKs that you provide (except for loans and living accommodation) will have to be reported and taxed through payroll.

Your 6-step guide to HMRC expense compliance

1. Understand the rules

• Familiarise yourself with HMRC’s guidelines on allowable expenses. 
• Stay updated: keep an eye on any changes to tax laws and regulations.

2. Keep detailed records

• Keep all receipts for expenses—no matter how small. 
• Maintain a mileage log: if you use your car for business, keep a detailed record of your mileage. 
• Document the business purpose: explain why each expense was necessary for your job.

3. Categorise your expenses

• Clearly distinguish between expenses incurred for business purposes and those for personal use. 
• Use appropriate expense categories (e.g., travel, accommodation, meals, office supplies).

4. Claim the right amount

• Make sure that your expense claims are in line with HMRC’s rules and regulations. 
• Only claim for reasonable and necessary expenses.

5. Submit your claims on time

• Follow your company’s specific procedures for submitting expense claims. 
• Don’t delay in submitting your claims to avoid potential issues. 

6. Choose an expense management system that fully complies with HMRC

A sophisticated expense management system like Capture Expense will help you automate the process, reduce errors, and comply with HMRC regulations.  You need to look for a system that can: 

• Automatically calculate mileage claims based on HMRC rates 
• Generate accurate expense reports 
• Integrate with your accounting software 
• Provide real-time insights into your spending habits 
• Offer robust audit trails for expense compliance purposes 

Do you still need help with expense compliance?

Book a personalised demo today and we’ll help you with all your expense compliance needs. There’s not a mileage query we can’t handle, or a tax problem we can’t solve.