What is expense reimbursement? A guide for UK employers

No matter the size of your business, if you are responsible for the finances or people within it, then you’ll need to be involved in the repayment of outlays your staff incur.

This doesn’t mean you’re paying for their lunch every day, rather that you’ll need to reimburse items such as travel, accommodation and subsistence required when they are away from their usual workplace on company duty. 

Increasingly, in the world of hybrid work, companies are also contributing financially to home working equipment, such as keyboards and laptop stands, or for occasional train travel into the office. 

But expense management is about much more than simply reimbursing your staff. It’s about creating a consistent company-wide expense reimbursement policy. This must cover reimbursement claim procedures, fair use limits, settlement timelines, and HMRC reporting.

We’ve put together the following guide to expense reimbursement for UK employers. As part of it, we’ve sought to answer some common questions around this seemingly menial topic, but one that you should be nailing as a business regardless.

What is expense reimbursement?

Put simply, expense reimbursement is when an employee is paid back for expenses incurred on corporate duties. And as alluded to above, whereas this tends to mean travel, accommodation and subsistence (food and drink), there are many other examples of expenses that we’ll go into in more detail below. 

The reimbursement of expenses, however, is not only a process of paying employees back, it also involves notifying HMRC of how you wish to handle and document the spending. This can be done under a payrolling benefits arrangement — whereby claim payments are made through payroll and reported to HMRC each month together with the rest of your FPS (Full Payment Submission).

Alternatively, you may wish to submit a P11D form every July to declare all the reimbursements (and benefits paid) for the previous tax year. This is the most logical approach if you don’t reimburse employees as part of their payroll (i.e., if it’s done via bank transfer later during the month).

What are some examples of expenses that companies reimburse?

Companies may reimburse employees for common expenses incurred on company time, such as travel and accommodation. Some may also choose to contribute entirely or partially towards other items such as uniforms, remote working computer equipment, commuting expenditure or fruit and veg boxes that they wouldn’t usually be expected to cover. Let’s get into it all below.

Travel, accommodation and subsistence

Even in the post-pandemic, hybrid world of work, people still need to travel for their jobs every now and again. In fact, it’s especially the case in the new world of work, where workers are increasingly spread out across the country. It could be that you’re organising a physical meet-up ‘offsite’, or a team-building day away from the office, a train ride away. Indeed, here at PayFit, as a French headquartered operation, we often hop aboard the Eurostar to offsites over in Paris.

Other examples of travel expenses reimbursement include taxis, perhaps incurred when travelling across town from a hotel to a social event, e.g., a summer or Christmas party, or fuel costs. The latter may arise if you are an events or hospitality company, and are reimbursing workers the mileage for driving across the country with a van full of equipment.

And when staying away from home for a job commitment, you’ll need to factor in hotel costs as an expense reimbursement that will need overseeing.

Socials and events

Many finance teams allocate a set amount of budget each month or quarter to teams for socials, such as a team-building day, lunch or after-work drinks. In this case, managers typically pay for the outings using corporate cards, and then claim it all back as an expense afterwards.

It may also be the case that a worker is representing the company at an external event or trade show — in which case they will likely expect to be reimbursed for any meals — usually adhering to a budget set by the finance department.

Uniforms, clothing, tools and equipment

Certain types of company, such as those utilising factories or building sites, or ones where a consistent uniform is required (think chefs, waiters, or corporate drivers) may expect workers to purchase their own uniforms or protective gear, and claim back for it afterwards.

It could also be the case that a workplace union requires companies to reimburse staff for particular items, e.g., hard hats, work boots and tools.

Perks and benefits

As the battle to convince top talent to up sticks and join your business intensifies, so too does the need to provide an attractive package outside simply remuneration. 

Company expense reimbursement policies increasingly incorporate items that employees wouldn’t traditionally expect to receive back, but that will benefit their day-to-day experiences, well-being and job satisfaction. These might include contributions towards home working equipment (such as stand-up desks, laptop stands or meeting cameras), train travel into the office (to encourage face to face collaboration in a hybrid environment), or health and wellness subscriptions (gyms, mental health apps etc.).

Today’s workforce increasingly looks for and even expects perks such as these to be included within a company expense reimbursement policy. They could be the difference between a hot hire choosing you over a competitor.

How have expenses traditionally been recorded?

Employee expense reimbursement has traditionally been quite a manual — and therefore time-consuming, potentially error prone —  process. Convention dictates that staff provide scans, or physical copies, of receipts to their manager, perhaps together with an expenses spreadsheet, to then be approved and reimbursed (or otherwise) by finance.

Taking a step back and looking at the steps involved, it’s easy to see how this approach could lead to an unnecessary degree of back and forth, not to mention errors.

What if the expenses claimant doesn’t submit all the required receipts, doesn’t complete their expenses spreadsheet with all the required information, or uploads incorrect figures? Cue having to take the time to draft an email asking them to resubmit the claim, and any subsequent chase ups that may be required. All of this distracts you from other commitments, and can get pretty mind-numbing after a while.

How are expenses reported with PayFit?

With PayFit, the set of processes for employee expense reimbursement is drastically simplified. Our expenses module, included with the Standard and Premium packages, reduces the entire procedure to a matter of a few clicks. But how, you may ask?

Via a secure login, your staff can simply upload a picture of their receipt, the software detecting the amount and auto populating the field, or input the data manually. For enhanced reporting capabilities, all purchases must be categorised by claimants, which will allow you to better reconcile them later down the line.

Then, they’ll click ‘submit the expense’, their manager (or you) will be notified and the expense can either be approved or rejected in minutes.

And the best part? Once approved, the expense will be added to the employee’s next payslip instantly, meaning that it is paid through payroll automatically on the next payday. And that’s it! Expense reports and spreadsheets are eradicated overnight.

To save you time, you can define your company expense policy in PayFit, and only when an expense exceeding this is submitted are you alerted. This frees up your time for strategic and growth initiatives.

Are reimbursed expenses taxable?

Generally speaking, the kinds of expenses we’ve been talking about are not taxable. Many expenses are tax-deductible, meaning that you can claim back the tax on these, e.g., necessary computer equipment.

In order for expenses to be treated as an allowable deduction for tax, two conditions must be met:

1. The employee is obliged to incur and pay it as holder of the employment; and

2. The amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

But there are exceptions —  most notably around ‘added extra’ expenses that aren’t necessary in order to carry out duties. 

Sometimes referred to as benefits-in-kind, these include private health insurance, home phones that are also used for personal use, gym memberships and a weekly food allowance.

These types of expenses are taxable, and in most cases will require a P11D form to be submitted to HMRC each July for every applicable employee.

Do casual or zero hours workers qualify for expense reimbursement?

Those on zero hours contracts can be legally classed as employees or workers, and therefore qualify for the reimbursement of expenses incurred whilst performing company duties in the same way that a full or part-time worker does.

Whilst there is no requirement in law for an employer to reimburse employees for expenses including travel, particularly where the worker in question has used their own car for business purposes, many do as a matter of good practice. Doing so will help create an attractive package for would-be zero hours workers.

How should expenses be reported to HMRC?

Expenses can be reported either through your payroll (when submitting a Full Payment Submission each month) or online by using a P11D, for any expenses or benefits that were not payrolled. In this case, you must also submit a report for any Class 1A National Insurance you owe (a P11D(b)).

PayFit automatically generates a P11D at the appropriate time each year (which you can then submit to HMRC) and, as we have discussed above, all approved expense submissions are added to employee payslips automatically. What’s more, RTI (real time information) submissions, including Full Payment Submissions, are handled by the PayFit platform on your behalf. 

In short, reporting expenses to HMRC is one less thing you’ll have to concern yourself with when using PayFit.

What is the best way to manage employee expense reimbursement?

There are a few good practice steps that you can take as a finance, HR leader or business owner to effectively manage expense reimbursement, to ensure consistency and keep everything accountable right across the business.

These include:

• Creating a clearly defined expense reimbursement policy, covering, for example, timeframes for submitting expenses, financial limits for particular items, what can and cannot be claimed for, and how you will pay and report expenses.

• Making it simple for employees to request expense reimbursement - an expense management software, such as the one included with PayFit, is the best way to do this.

• Automating where possible — step forward again with PayFit.

To find out more about how PayFit helps make the entire payroll process, including expense accounting, a breeze, why not book a short demo with one of our product specialists?

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