No small business operates in isolation, and as you get busier and bigger, you might find yourself working with other people, hiring contractors or self-employed individuals, or even setting up a Pay As You Earn (PAYE) scheme and hiring your own employees.
Once you start working with others, it’s important to know what payments your employees can make and expect to be reimbursed, and what you’re able to write off as a valid business expense – helping you to ensure that you and your hired workers are paying the correct amount of tax and are being reimbursed for appropriate expenses.
Sometimes you might find that your employees will incur expenses on behalf of your company, and they may need to use their own funds to do so. These transactions must be kept note of, and it’s both ethically and legally required that your company reimburses these payments promptly, and in full.
This does not mean that employees can claim reimbursements for every payment they make – you need to have set rules for what they can claim for, and examples of what they can’t.
To decide what is a business expense, you first need to determine that it is clearly for the business, and the expense is something that is related to the services of the business – this could range from the cost of a hotel stay during a business trip, an extra piece of hardware for their workstation, or payment of a fee (such as a toll) on a business journey.
Once you’ve determined what is covered by your expenses, the employee needs to provide evidence of the payment – this could be a receipt, invoice, or other proof of purchase; at the very minimum the document should include the total amount (with any due tax), the date (and time if possible) of purchase, the location, and a description of the product or service provided.
You should set up within your company a timeframe for employees to report reimbursable payments, so that you can keep a clear record of what is being spent, on what, and when – and you can pay those costs back in a set time frame.
It’s important to keep records of the expenses and repayments, as they may be eligible for tax deduction, and will form part of the accounts that you are legally obligated to provide to HMRC.
As we mentioned, reimbursing expenses doesn’t mean covering every expenditure that your employees make – and you need to make it clear what you will and won’t cover.
HMRC have clear rules about ‘allowable expenses’ and the tax and National Insurance (NI) reporting obligations, as well as specific rules for individual benefits that you provide your employees – and you will need to follow specific reporting and payment rules for different items, including travel, meals, and accommodation; so it’s important that you understand what you need to report, and when, before you put an expenses policy into place.
Expenses that your policy could cover include:
It’s important that you work out a budget for each expense cost, and carefully monitor what is being spent by your employees, to ensure that you’re not overspending.
Expense reports can be tricky to manage, especially if there aren’t clear procedures on what information is required, when the employee must make their claim by, and the level of proof that is required to determine that it was a necessary and allowable expense. Most businesses will have processes in place for authorisation of expenses, so that employees can’t make claims for costs that haven’t been approved before hand – and records of authorisation need to be kept as well, in order to authenticate claims.
If you’re not sure what expenses you or your employees should be claiming, or how to accurately record and report them all, we’re here to help you. Our team of experts has years of qualified experience in working with payroll, and helping you keep on track, and on top of your expenditure. Contact us today for a consultation and let us help you make your payroll a simple process.
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