A Guide to Reimbursing Employee Expenses

As a small business owner, having a clear policy for reimbursing employees for work-related expenses is crucial. It not only keeps your team happy and focused, but it's also good for your bottom line. When employees don't have to worry about covering costs themselves, they can be more productive.

However, managing reimbursements can be tricky, especially for smaller companies. You need to balance controlling costs with not overburdening staff with tedious processes.

This guide will walk you through everything you need to know about reimbursing employee expenses as a small business. From understanding which expenses qualify to handling taxes and documentation properly, you'll learn tips for streamlining approvals, choosing the right reimbursement methods, and setting clear expectations with your team.

Key takeaways

• Make sure your reimbursement policies are clear to keep your team focused and your finances organised.
• Simplify the reimbursement process by using tools like employee cards, which also come with extra benefits.
• Keep an eye on your expense reimbursement system regularly to catch any problems early and keep things running smoothly.
• When reporting expenses to HMRC, keep good records and use the right forms to stay compliant.
  
  

What is expense reimbursement?

Expense reimbursement is when a company pays back its employees for costs they had to cover out-of-pocket while doing their jobs. As a small business owner, reimbursing employee expenses is an important part of your operations.

Not all expenses need to be reimbursed though. Reimbursable expenses are costs that are directly related to an employee's work duties and responsibilities. Things like travel, office supplies, or required training usually qualify for reimbursement. Personal expenses like dry cleaning bills or a brand new laptop for home use typically would not be reimbursed.

As you develop your reimbursement policy, get clear on which types of expenses your company will cover. Make a list of reimbursable expenses and qualifying conditions like spending limits. Communicate it clearly to employees.

Examples of reimbursable employee expenses

In your policy you should clearly define which types of expenses you will reimburse your employees for. Here are some examples:

Travel & accommodation expenses

When employees need to travel for work, make it clear that their transportation costs like train tickets and petrol can be reimbursed. Hotel stays for business trips should also be covered within reasonable limits set in your policy.

Food and drinks (subsistence) expenses

Establish guidelines for reimbursing meals purchased while employees are travelling or working overtime, like setting a reasonable daily limit. You can also request itemised receipts be submitted.

Uniform / clothing expenses

If your business requires employees to wear specific uniforms, safety gear, or clothing for their job duties, outline that these costs are reimbursable when purchased from approved suppliers or with prior approval.

Office supplies and equipment

Consider reimbursing employees for purchasing basic office supplies like printer ink, notebooks, or even more expensive equipment like laptops or monitors if it is needed for them to effectively perform their work. Establish approval processes and spending limits.

Professional development and training costs

Invest in your employees' growth by reimbursing costs for work-related courses, certifications or professional memberships. You could set an annual amount permitted per employee or ask for each request to be submitted on a case by case basis.

Legal and tax considerations

As always, the legal and tax implications have to be considered. When it comes to reimbursing employee expenses, following the rules can help you avoid penalties and costly mistakes.

Under UK tax law, most reimbursed employee expenses are non-taxable for the employee if they are solely for business purposes and properly documented. However, there are some exceptions you need to be aware of.

When it comes to VAT, you generally cannot claim back the VAT portion on reimbursed employee expenses. This is because HMRC views the employee as the final consumer. However, there are some allowable VAT claims for fuel costs related to business travel.

Here are some tips to stay compliant:

• Have a clear expense reimbursement policy outlining which expenses qualify and documentation needed
• Require detailed receipts or invoices from employees to prove business purpose
• Keep good records of reimbursed amounts in case of an HMRC audit
• Understand special rules around benefits like clothing costs or professional subscriptions
• Monitor reimbursements and payroll to ensure employees aren't being undertaxed

While the rules around employee expense reimbursement law UK can seem complex, following best practices protects both you and your staff. If you're ever unsure, consult an accountant.

Establishing reimbursement policies

Your policy will serve as your guideline for employees on what expenses will be reimbursed and the proper procedures to follow. When developing it, here are some key areas to focus on: 

Defining eligible expenses

Using the advice above, make a list of all the types of expenses your company is willing to reimburse, such as travel, meals, office supplies, etc. Be as specific as you can about what qualifies and what doesn’t to avoid confusion. For example, if you’re happy to reimburse office supplies such as printer ink, but not pens, clarify that. 

Setting spending limits and approval thresholds

Determine reasonable limits for different expense categories, such as a £40 per day meal allowance while travelling. You can also set thresholds requiring manager approval for expenses over a certain amount. 

Incorporating company values and cost-saving strategies

Use your policy to reinforce company values like sustainability by encouraging employees to make cost-effective choices. Promote using public transport over personal cars when possible. For example, at Capital on Tap, we encourage our employees to use the train instead of driving or flying when visiting other offices.

Providing examples and guidelines for specific scenarios

Include examples covering different circumstances employees may encounter, like rules around client entertainment, office snacks, or international travel. This means your employees will feel empowered to make a sensible decision. 

Be sure to get input from employees, managers, and your finance team when drafting the policy. Consider your company's budget, industry norms, and business objectives.

Regularly communicate and provide training on the reimbursement policy. Post it in an accessible place and send reminders when making updates.

Documentation and record-keeping

Proper documentation and record-keeping are essential parts of managing reimbursable expenses efficiently. Here’s why they matter and how to ace them: 

Importance of accurate documentation 

• Compliance: Detailed documentation ensures compliance with regulations as well as audit requirements, reducing the risk of fines. 
• Transparency: Transparent records build trust with employees and stakeholders, showcasing your commitment to accountability. 
• Cost control: Tracking expenses accurately helps identify cost-saving opportunities and prevent overspending. 
  
  

Best practices for organised records

• Establish a system: Set up a consistent method for recording expenses, whether it’s using spreadsheets, accounting software, or a dedicated expense management system. 
• Regular submission: Encourage employees to submit expense reports promptly with all necessary documentation, such as receipts and explanations for each expense. 
• Digital solutions: Utilise digital tools, like your Capital on Tap card for streamlined expense tracking. This way employees can easily upload receipts and notes straight away. 
• Categorisation: Organise expenses into relevant categories for easier tracking and analysis, simplifying reporting and budgeting. 
• Backup and security: Ensure backups of digital and physical records are regularly performed to prevent data loss. Implement security measures to protect sensitive information.
  
  

Approval process

Ensuring a smooth and efficient approval process is key for maintaining your reimbursement policy. Here’s a breakdown of the steps involved and tips for optimising it: 

Steps in an expense approval process

• Submission: Employees submit expense reports along with supporting documentation, such as receipts and explanations for each expense.
• Review: The designated approver reviews the expense reports to ensure accuracy, adherence to company policies, and alignment with budget.
• Approval: Approved expenses are then authorised for reimbursement or payment.
• Rejection or revision: If any issues are identified during the review, the expense report may be rejected or sent back to the employee for revision.
• Recording: Approved expenses are recorded in the company's financial records.
  
  

Tips for implementing efficient workflows

• Utilise employee cards: Implement employee cards, such as those provided by Capital on Tap, to streamline the expense approval process. These cards allow for real-time monitoring of expenses and automated categorisation, reducing manual effort and speeding up approvals. It also allows you to earn 1% cashback on your employees' spending.
• Delegation of authority: Clearly define roles and responsibilities regarding expense approval authority. Delegate approval authority to trusted individuals while setting appropriate spending limits to prevent unauthorised expenditures.
• Regular training and communication: Provide training to employees and approvers on the expense approval process and any tools or software used. Regularly communicate updates or changes to ensure everyone is on the same page.
  
  

Reimbursement methods

Choosing the right reimbursement method for your business can seem daunting. Here’s an overview of different methods, their pros and cons, and recommendations for choosing the best option for your business. 

Overview of different reimbursement methods

• Direct deposit: With direct deposit, employees receive reimbursement directly into their bank accounts. This method is convenient and fast, eliminating the need for paper checks.
• Cheques: Traditional paper cheques are another option for reimbursing employees. While checks provide a tangible record of payment, they can be slower and may incur additional costs for printing and mailing.
• Corporate cards: Corporate cards or employee cards, like those offered by Capital on Tap, provide employees with a designated card for making business purchases. Expenses are automatically recorded, reducing the need for reimbursement altogether.
  
  

Choosing the most suitable reimbursement methods

• Consider employee preferences: Take into account the preferences of your employees. Some may prefer the convenience of direct deposit, while others may prefer not having to worry about it at all with employee cards.
• Assess administrative burden: Consider the administrative burden associated with each method. Employee cards generally require less manual processing compared to other methods.
• Think long-term: Consider the long-term benefits and scalability of each reimbursement method. Employee cards, for example, offer ongoing benefits such as cashback, streamlined expense management, and improved financial visibility.
  
  

Managing employee expectations

Effective communication means you can stay on top of your employees expectations when it comes to reimbursement. Here’s some tips on how to ensure clarity:

• Clearly define policies: Provide employees with a detailed explanation of your company's reimbursement policies and procedures. Make sure they understand what expenses are eligible for reimbursement and how to submit reimbursement requests.
• Open dialogue: Encourage employees to ask questions and voice concerns about the reimbursement process. Maintain open lines of communication to address any issues promptly.
• Set expectations: Communicate clear timelines for reimbursement processing and let employees know what to expect in terms of approval and payment schedules.
• Address concerns: Be proactive in addressing common concerns and FAQs related to expense reimbursement. Provide explanations and guidance to stop any confusion or uncertainty.
• Transparency: Emphasise the importance of transparency and fairness in handling reimbursement requests. Treat all employees consistently and ensure that reimbursement decisions are made objectively.
  
  

Monitoring and evaluation

It's important to keep an eye on how your expense reimbursement system is working. Regularly checking it helps catch any problems early on, like mistakes or rule violations. You can do this by reviewing the process every so often and getting feedback from your employees. Their input can be really helpful in spotting areas that could be better. 

When you find issues, make sure to fix them quickly. Keep improving the process over time by making changes as needed, so it stays efficient and meets the needs of your business.

The bottom line

Managing employee expenses might be one of the most important aspects of a business’s operations. Make sure your reimbursement policies are clear and that everyone in your business knows and understands them. Consider using tools like employee cards - they can really simplify things and even come with extra perks. 

Implement the strategies you’ve learnt in this guide and keep an eye on how things are going. Regular checks help catch any issues early on and keep your finances running smoothly. By doing all this, you aren’t just managing expenses - you’re setting your business up for success. 

Frequently asked questions

Some commonly asked questions about employee expenses:

Do I pay taxes on expense reimbursements in the UK?

In the UK, most reimbursed employee expenses are considered non-taxable if they are solely for business purposes and properly documented. This means that, generally, you do not pay taxes on expense reimbursements. However, it's important to follow HMRC guidelines and maintain accurate records to ensure compliance. Additionally, there may be exceptions or specific rules for certain types of expenses, so it's advisable to seek advice from a tax professional for personalised guidance tailored to your business.

How should I report expenses to HMRC? 

To report expenses to HMRC, start by keeping detailed records of all reimbursed expenses, including receipts and explanations. Compile these into a comprehensive expense report. Depending on your business structure, use the appropriate HMRC forms, such as the Self Assessment tax return form for self-employed individuals. Attach all relevant documentation to your tax return or other forms and submit them to HMRC by the deadline. If you need guidance, consider consulting a tax professional or contacting HMRC directly for assistance.

This does not constitute financial advice. If you want to understand your business’ tax or expense obligations in detail, you should speak to your financial advisor or accountant.