Employee Expenses: Policy and Process Guide
Managing business expenses. Creating a policy, what to reimburse, tax implications, and preventing fraud.
Last updated: 29 January 2025
Clear expense policies protect both you and your employees. They ensure legitimate costs are reimbursed while preventing abuse.
Why You Need a Policy
Benefits
- Clarity on what's covered
- Consistent treatment
- Tax compliance
- Fraud prevention
- Budget control
- Efficient processing
Without One
- Confusion and disputes
- Inconsistent approvals
- Tax problems
- Potential fraud
- Unfairness
- Time wasted
Policy Contents
Scope
Who it covers:
- All employees
- Directors
- Contractors (if applicable)
- Agency workers
What it covers:
- Business travel
- Accommodation
- Meals/subsistence
- Client entertainment
- Professional subscriptions
- Other legitimate costs
General Principles
- Must be for business purposes
- Reasonable and proportionate
- Pre-approval where required
- Receipts mandatory
- Timely submission
- Honest claims
Approval Levels
Set clear authorities:
| Amount | Approver |
|---|---|
| Up to £100 | Line manager |
| £100-500 | Department head |
| £500+ | Director/Finance |
| Director expenses | Board/Chair |
Claiming Process
- Incur expense
- Keep receipt
- Submit claim (within X days)
- Manager approves
- Finance processes
- Reimbursement paid
Categories of Expenses
Business Travel
What's covered:
- Public transport
- Mileage for own car
- Taxis (when appropriate)
- Parking
- Tolls
- Flights and trains
Mileage rates (HMRC approved):
- Cars: 45p first 10,000 miles, 25p after
- Motorcycles: 24p per mile
- Bicycles: 20p per mile
Not covered:
- Home to office commuting
- Personal travel
- Fines and penalties
- Upgrades (unless approved)
Accommodation
When claimable:
- Away from normal base
- Business necessity
- Reasonable standard
Limits:
- Set nightly limits (e.g., £120 London, £90 elsewhere)
- Require pre-approval over limit
- Budget hotels where practical
Not covered:
- Mini-bar
- Movies
- Personal phone calls
- Laundry (unless extended trip)
Meals and Subsistence
When claimable:
- Working away from base
- Business meetings
- Working late (beyond normal)
Limits:
- Breakfast: £X
- Lunch: £X
- Dinner: £X
- Or daily total
Not covered:
- Alcohol (or capped)
- Excessive amounts
- Personal meals
Client Entertainment
When allowed:
- Genuine business purpose
- Reasonable cost
- Pre-approved
- Properly recorded
Requirements:
- Business reason documented
- Client name(s)
- Itemised receipt
- Approval obtained
Limits:
- Per head limits
- Annual limits
- Senior approval
Professional Subscriptions
Covered if:
- Required for role
- Pre-approved
- HMRC-approved body
Process:
- Annual approval
- Direct payment or reimbursement
- Renewal tracking
Working from Home
If you pay allowance:
- £6/week tax-free (no evidence needed)
- Or actual costs (with evidence)
- Consistent approach
Equipment and Supplies
Covered:
- Items needed for role
- Pre-approved
- Reasonable cost
- Company owns item
Not usually covered:
- Personal items
- Standard office supplies (use company)
- Equipment without approval
Receipts and Evidence
Requirements
For every claim:
- Original receipt
- VAT receipt where possible
- Shows what was purchased
- Date visible
- Provider name
Lost Receipts
Policy options:
- No receipt, no payment (strict)
- Signed declaration allowed (some limit)
- Exception process for senior approval
What's Not a Receipt
- Credit card statements alone
- Handwritten notes
- "No receipt available" repeatedly
Submission Process
Timing
Set reasonable deadlines:
- Within 30 days of expense
- Monthly submission deadline
- End of year cut-off
Method
Options:
- Expense software (recommended)
- Expense forms
- Email with attachments
Information Required
- Date of expense
- Category
- Description
- Amount
- Business reason
- Receipt attached
Approval Process
Manager Responsibility
Before approving, check:
- Genuine business purpose
- Correct category
- Within policy
- Receipt attached
- Reasonable amount
- No duplicates
Segregation
- Person incurring ≠ person approving
- Person approving ≠ person paying
- Random audits by finance
Escalation
When to escalate:
- Unusual claims
- Policy questions
- Suspected fraud
- Appeals
Tax Considerations
Tax-Free Reimbursements
No tax if:
- Wholly, exclusively, necessarily for job
- Business journey (not commuting)
- Actual cost reimbursed
- Properly evidenced
Taxable Expenses
Tax applies if:
- Personal benefit element
- Exceeds allowable limits
- Not for business purpose
- Round sum allowances (usually)
P11D Reporting
Report taxable benefits:
- Annual P11D
- Or payroll expenses
- Class 1A NI
Dispensation/Scale Rates
HMRC benchmark rates for:
- Overnight stays
- Overseas travel
- Specific rates available
Fraud Prevention
Common Frauds
- Claiming personal expenses
- Inflating amounts
- Duplicate claims
- Fake receipts
- Phantom expenses
- Claiming for cancelled trips
Controls
Detection:
- Manager review
- Finance audits
- Pattern analysis
- Duplicate checking
- Software controls
Prevention:
- Clear policy
- Training
- Receipt requirements
- Approval process
- Consequences known
Warning Signs
- Unusual patterns
- Round numbers
- Same amounts repeatedly
- Claims just under approval limits
- Missing receipts frequently
- Similar claims from same supplier
If Fraud Suspected
- Investigate properly
- Gather evidence
- Consider disciplinary
- May be gross misconduct
- May involve police
- Recovery of funds
Expense Software
Benefits
- Easy submission
- Receipt capture
- Automatic routing
- Audit trail
- Reporting
- Integration with payroll
Features to Look For
- Mobile app
- Photo receipts
- Policy enforcement
- Approval workflow
- Reporting tools
- Integration capability
Policy Review
Regular Review
Check annually:
- Rates still appropriate
- Policy working
- Common issues
- Needed changes
- Benchmark comparison
Communication
Ensure employees:
- Know policy exists
- Understand process
- Can access guidance
- Know who to ask
Checklist
Policy Creation
- Define scope
- Set approval levels
- Specify categories
- Set limits
- Receipt requirements
- Submission process
- Tax treatment
- Fraud consequences
Implementation
- Communicate to all
- Train managers
- Set up systems
- Provide forms/software
- Monitor compliance
- Regular audits
Ongoing Management
- Review claims properly
- Watch for patterns
- Update limits annually
- Train new starters
- Address issues quickly
- Policy review
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Frequently Asked Questions
- Do I have to reimburse employee expenses?
- Only if the expense was incurred for business purposes and either: your contract requires reimbursement, you've agreed to reimburse, or the expense was authorised. Employees shouldn't be out of pocket for genuine business costs, but you can set limits and require prior approval.
- What expenses are tax-free for employees?
- Legitimate business expenses reimbursed don't create a tax liability if they're wholly, exclusively and necessarily for the job. This includes business travel, subsistence, accommodation, and professional subscriptions. Anything with a personal benefit (like commuting) may be taxable.
- How can I prevent expense fraud?
- Key controls: require receipts, set approval limits, review claims regularly, check for patterns, separate approval from payment, use expense software, conduct spot checks, and have clear consequences for fraud. Most fraud is small amounts over time - watch for unusual patterns.