The importance of a good expenses policy

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With in-person events and face-to-face meetings making a comeback post-pandemic, employee expense claims are on the rise. It is therefore more important than ever to consider implementing a straightforward expenses policy to assist employees in determining what they can, and more importantly, what they can’t, claim back.

While an expenses policy is not a strict legal requirement, a well-drafted policy will have number of key benefits, not just for employees but also for employers. These include:

  • Boosting financial performance – Placing defined limits on the expenses incurred by employees can have a positive impact on the financial performance of a business by allowing areas of excess expenditure to be identified, monitored and addressed if necessary.
  • Boosting morale – Employees who have an understanding of what they can claim for, how they can do this and when they will be reimbursed are less likely to become frustrated and dissatisfied. A well-communicated expenses policy can help to avoid any situations in which employees feel they’re ‘out-of-pocket’ for expenses they had assumed would be covered, helping to avoid the kind of animosity which can cause a breakdown in relationships.
  • Avoiding unjustified claims – The simple existence of a policy can deter employees from making unjustified expenses claims as they are much less likely to ‘chance their arm’ if proper boundaries have been put in place.
  • Avoiding tax liability – Businesses without a considered policy may encounter inaccuracies in the reporting of expenses which can lead to incorrect tax treatment, giving rise to liability. The tax treatment of expenses is already a complex area of law, and having a well-organised policy which allows expenses to be efficiently recorded and categorised is of vital importance in facilitating the identification and resolution of any concerns.
  • Ensuring compliance with the Bribery Act 2010 – Expenditure on promotional gifts and hospitality can be a high-risk area under the Bribery Act 2010. Having an unambiguous policy will help employees to draw the line between proportionate corporate hospitality that has a legitimate business purpose and acts which could be defined as an offence under the Act. It will also help a business to show its commitment to compliance with the Bribery Act, one of the Act’s key principles.

The benefits set out above will however only be achievable where the policy in question is well thought out and properly drafted.

When putting together a policy, an employer should ensure that the document is clear about which expenses can be claimed back, and by whom. It should also explain the procedure by which expenses should be submitted and how they will be approved, detailing any relevant time-limits or evidentiary requirements (for example the need for VAT receipts) and the channels for employees to raise questions or concerns.

The document should also draw attention to the Bribery Act, setting out limits on the appropriate levels of expenditure and emphasising that there is a key distinction between legitimate hospitality and bribery offences.

Some of the most common pitfalls businesses can fall foul of in drafting and executing expenses policies

  1. Overcomplication – To be effective, an expenses policy should be easy to understand and apply. The use of jargon and unnecessary complexity will only confuse employees and managers, undermining the positive benefits that a policy can bring. It will also lead to inefficiency as valuable time will be spent on assessing what should be simple claims and explaining the nuances of the policy.
  2. Miscommunication – Even the best policies will not be effective if they are not properly signposted. All employees should know how and where to access the policy and who to go to with any questions.
  3. Failure to maintain – It is important for the policy to be regularly updated to ensure that it reflects any changes in procedure or, more generally, changes in the wider economic landscape. A business will for example need to react to fluctuations in the cost of living when setting out spending limits for employees.
  4. Consultation – Employees should be engaged and consulted when implementing a policy. This will help ensure that the policy is considered fair and accurately reflects the key types of expenses actually incurred by employees.
  5. Rigidity – While clarity is important in implementing an expenses policy, there will inevitably be cases in which a rigid approach is ineffective due to unique circumstances. Businesses will need to be alive to this and should be willing to exercise flexibility where required to deal with less common types of expense claims.

What is clear is that there is no ‘one size fits all’ approach for employers when it comes to expenses policies and while taking the time to draft and implement a policy may not seem like a top priority for business leaders, it can certainly save a lot of potential headaches in the long run.

This article was written alongside Stephanie Hodgetts.

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