Do you reimburse your employees for expenses incurred while working? Do you want to know the legal requirements when it comes to employee expense reimbursement law in the UK? If so, you’ve come to the right place.
We’ll outline what constitutes an employee expense reimbursement. We’ll also look at the legal framework governing expense reimbursement in the UK. Finally, we’ll provide you with our top recommendations so you can stay HMRC compliant and ensure a smooth reimbursement process.
What is employee expense reimbursement?
Employee expense reimbursement is a process where you repay your employees for business-related expenses they have personally covered. These expenses can include travel costs, meals, accommodation, or any other out-of-pocket expenses they incur while performing their job duties.
The process typically involves employees submitting receipts or expense reports, which are then reviewed and approved by your finance team before reimbursement is issued. This method helps make sure that your staff aren’t financially burdened by work-related costs, allowing them to focus on contributing to your business’s success.
Common types of reimbursable expenses in the UK
Travel expenses
- Commuting: includes transportation costs such as public transport fares, mileage, parking fees, and tolls.
- Accommodation: covers hotel stays or other lodging expenses during business trips.
- Meals: encompasses food and drink expenses incurred during travel or while entertaining clients.
Equipment and supplies
- Office supplies: items such as pens, paper, and other stationery.
- Equipment: larger items like laptops, printers, and office furniture.
Training and professional development
- Courses and workshops: fees for attending professional courses, workshops, or conferences.
- Certifications: costs associated with obtaining professional certifications relevant to the job.
Phone and internet bills
- Mobile phone bills: monthly charges for business-related phone usage.
- Internet costs: fees for home internet if used for remote working.
Employee expense reimbursement law in the UK
The legal framework governing employee expense reimbursement in the UK is primarily based on common law principles and statutory provisions. While there isn’t a specific statute dedicated solely to expense reimbursement, various employment laws and tax regulations provide guidance on this matter.
Let’s look at some key legal considerations:
Employment Rights Act 1996
The Employment Rights Act 1996 outlines the basic rights of employees, including the right to be paid for work done and to receive wages that are not below the National Minimum Wage. While it doesn’t explicitly address expense reimbursement, it can still be relevant in certain contexts. For example, when employees incur costs related to their job duties, they may expect reimbursement. This expectation typically applies to reasonable expenses incurred while performing their responsibilities.
Tax legislation
UK tax laws, such as the Income Tax (Earnings and Pensions) Act 2003, provide guidance on the tax treatment of employee expenses. Reimbursed expenses are generally exempt from income tax if they are incurred for business purposes.
Implied term of contract
In many cases, there is an implied term in an employment contract that the employer will reimburse employees for reasonable business expenses incurred on their behalf.
HMRC guidelines on reimbursable expenses
HMRC’s guidelines on reimbursable expenses provide detailed instructions on what constitutes allowable expenses (such as travel and subsistence. HMRC distinguishes between business expenses and personal expenses to ensure only legitimate business expenses are reimbursed without tax implications.
Reporting your employee expense reimbursements to HMRC
When handling employee expense reimbursements, you have two main options for reporting these expenses:
- Firstly, you can use a P11D form to report expenses and benefits to HMRC at the end of the tax year.
- Alternatively, you can opt for payrolling, where you include the value of the expenses and benefits in the employee’s pay. This method spreads the tax due across the year, which can be more manageable.
Record keeping
You should keep records of all itemised receipts, completed reimbursement forms, the purpose of expenses, amounts spent, and any relevant documentation outlined in your expense policy.
Common challenges between you and your employees when it comes to reimbursements
Disputes over what constitutes a legitimate expense
Disputes over what constitutes a legitimate expense can be a recurring issue between you and your employees. Often, the grey areas arise from differing interpretations of the expense policy.
For instance, while you might consider a client lunch a justifiable business cost, an employee could see a casual coffee meeting the same way.
Delays in reimbursement
Delayed reimbursements can seriously affect your employees’ morale. When your team experiences repeated delays in getting reimbursed for their expenses, it creates financial strain and frustration.
This lack of timely compensation can decrease trust in your company, reduce job satisfaction, and lower motivation among your staff.
Expense reimbursement strategies to consider
Provide employee training
For an expense to be reimbursable and non-taxable, it must be incurred wholly, exclusively, and necessarily for business purposes. Ensuring that your employees understand this is essential.
You should invest in training sessions that explain:
- What qualifies as a reimbursable expense.
- How to document expenses accurately.
- The importance of timely submissions.
Create a clear and concise expense policy
An expense policy template is the backbone of any reimbursement strategy.
Your policy should be:
- Clear: avoid ambiguity by laying out which expenses are eligible for reimbursement.
- Concise: make sure it’s easy to read and understand, avoiding overly technical language.
- Accessible: employees should have easy access to this document at all times.
Implement expense management software
Manual expense management can be time-consuming and error-prone. Automating this process with expense management software like Capture Expense offers numerous benefits:
- Efficiency: speeds up the submission and approval process.
- Accuracy: reduces human errors in data entry.
- Transparency: provides real-time tracking and reporting of expenses.
- Compliance: ensures adherence to company policies and tax regulations.
Meet Capture Expense
Simplify and automate how you manage your expense reimbursements using the intuitive Capture Expense app. Book a personalised demo today to see how we can help.