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Employee expenses (part 5)

Updated 25 September 2024

Read purpose, scope and audience (part 1) and general approach to VAT compliance controls (part 2) of Help with VAT compliance controls — Guidelines for Compliance GfC8, if you have not already.

Expenses processes exist for capturing, authorising and paying various kinds of reimbursed business costs to employees, such as travel, accommodation, food and hospitality. It can consist of the following steps:

1. Employee incurs business expense.
2. Employee receives physical or digital receipt.
3. Creation of an expense report with cash or card charges matched to receipts held.
4. Workflow for manager check and authorisation.
5. Workflow for ledger postings and bank payments.

The expenses process may be a function of the main accounting system, or a third-party solution that interfaces with the accounting system.

System configuration

Employee expenses systems rely on master data to process transactions, such as employee details, vehicle details, VAT codes and rates.

Control points

1. Initial system master data and subsequent changes should require authorisation.
2. Master data should be up-to-date and align with main accounting system repositories.
3. Standard expense types, for example for travel, meals and entertaining, should align with business practices.
4. Standard job roles should align with business practices.
5. Standard VAT templates should align with business practices.
6. Changes to third-party standard templates should require authorisation.
7. Third-party VAT codes should accurately map to main accounting codes for reporting.
8. Expense type spend limits should require authorisation.

Expense processing and workflow

Employees incurring business-related costs will use the expenses system to claim reimbursement. The system also allows a VAT registered business to capture input tax to reclaim through the VAT return, subject to the normal rules.

Control points

1. An expense policy should be in place and communicated to managers and employees.
2. The expense policy should specify examples of invalid claims, including personal and non-business use.
3. Access to the expenses system should be controlled through job profiles.
4. Ensure employees are trained to use the system accurately, including valid types of expense, VAT treatment, and the evidence required for input tax claims.
5. A valid VAT invoice or VAT receipt must be held to claim input tax. You can reclaim VAT on supplies of £25 or less without a receipt, if you can show that the supplier is VAT registered.
6. Automatic VAT calculation based on type and tax code is preferred to manual entry.
7. Data entry validation should be in place for location, dates and VAT value if entered.
8. Duplicate entries should be detected and queried.
9. Input tax must only be claimed in accordance with applicable employee subsistence rules.
10. Input tax must only be claimed in accordance with the rules on motoring expenses.
11. Input tax must only be claimed in accordance with the business entertainment rules.
12. Input tax must only be claimed in accordance with applicable rules on employee mobile phone call charges.
13. Workflow ensures that manager authorisation is required before posting to ledgers.
14. Ensure interface failures with the main accounting system are reported and followed up.

Expense scenarios and control examples

Motoring expenses

Appropriate VAT rates should be available and correctly applied, for motoring scenarios such as:

• on-street car parking costs are normally zero-rated 
• off-street parking costs are normally standard rated
• penalties or parking charges for breaching parking terms and conditions are generally outside the scope of VAT
• 50% input tax claim restriction for car rental over 10 days, where the car is not hired to replace an off the road ordinary company car
• privately operated road toll charges are standard rated
• public authority operated road toll charges are outside the scope of VAT
• VAT on road fuel reimbursed to employees can be claimed for identified business use
• VAT on road fuel reimbursed to employees can be claimed for mixed business and private use if the scale charge output VAT is accounted for to reflect private use

Examples of good controls would be:

1. Setting up a tax code for 50% input tax restriction.
2. Periodically reviewing car rental source documents for input tax claims.
3. Periodically reviewing parking source documents to confirm correct VAT treatment.

For the full guidance read Motoring expenses (VAT Notice 700/64)

Business entertainment

Appropriate VAT rates should be available and correctly applied for business entertainment event scenarios:

• 100% of VAT is reclaimable if event attendees are employees
• no VAT is reclaimable if event attendees are UK non-employees (for example, business contacts, clients or prospective clients)
• VAT is apportioned if event attendees are employees and non-employees

Examples of good controls would be:

1. Having a process for identifying attendees (as employee or non-employee).
2. VAT on non-employee entertaining is automatically blocked.
3. Automatic input tax apportionment based on split of employees and non-employees.
4. Training for expense system users and managers on high-risk VAT areas like business entertaining.

For the full guidance read Business entertainment (VAT Notice 700/65)

Mobile phones

Appropriate VAT rates should be available and correctly applied for employee mobile phone scenarios:

• VAT is reclaimable for handset costs and standing charges
• VAT on business call charges (with minimal private use) is reclaimable
• VAT is apportioned between free unrestricted personal calls and business calls

Examples of good controls would be:

1. Having a process for identifying business and personal (non-business) calls.
2. VAT on non-business calls is automatically blocked.
3. Automatic input tax apportionment based on split of business and personal calls.

For more information — read VAT guide (VAT Notice 700), section 12.3.

For guidance — read VIT43940 - Specific issues: mobile phones - HMRC internal manual

Expense claim auditing

Organisations usually monitor expense claims to guard against fraud or error. The built-in system checks and manager sign-offs are the first lines of control. Audit automation can also help with standard checks carried out pre-reimbursement. However, high volumes of claims and a desire to pay quickly can sometimes mean that post-claim auditing is necessary.

Control points

1. Ensure that expense data and source transactions are retained for the required period.
2. Expense system reporting options should be available to check claims, including VAT treatment.
3. 100% computer-aided checks will gain more assurance than sampling.
4. Standard claim checks should include VAT compliance.
5. Outsourced expense claim audits should include VAT compliance checks, if not done in-house.