The importance of a good expenses policy

• 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.

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.