Employee Expense Claims and Reimbursement

When employees spend their own money on legitimate business costs, the employer reimburses them through an expense claim. Getting the process right matters because incorrect handling creates unnecessary tax liabilities for both the employer and the employee, and can trigger questions during an HMRC compliance check.

What Counts as a Reimbursable Expense?

An expense is reimbursable if it is incurred wholly, exclusively and necessarily in the performance of the employee’s duties. HMRC applies this test strictly for employment expenses – more strictly than the “wholly and exclusively” test for self-employed tax-deductible expenses .

Common categories include:

Mileage Allowance Payments

When employees use their own vehicle for business travel, the employer can reimburse at HMRC’s Approved Mileage Allowance Payment (AMAP) rates without any tax or NIC liability:

If the employer pays more than the AMAP rate, the excess is taxable earnings. If the employer pays less, the employee can claim tax relief on the difference through Self Assessment.

Employees must keep a mileage log recording the date, destination, business purpose and distance for each journey. Without this, HMRC can disallow the claim.

Reimbursement Methods

There are two main approaches to reimbursing employee expenses:

Actual Cost Reimbursement

The employer reimburses the exact amount the employee spent, supported by a receipt. If the expense qualifies and is reimbursed at the actual cost, there is no tax or NIC to pay, provided the employer has a system to check that each claim meets the “wholly, exclusively and necessarily” test.

Round Sum Allowances

A round sum allowance is a fixed payment to cover anticipated expenses – for example, £20 per night for evening meals while away on business. Round sum allowances are treated as taxable earnings unless they fall within HMRC benchmark rates or are covered by a bespoke scale rate agreement.

HMRC’s benchmark rates for subsistence (2024/25):

These rates apply only when the employee is travelling on business and incurs actual costs. They cannot be paid routinely to employees who do not travel.

Tracking and Recording Expenses

A robust expense tracking process should include:

• Receipts for every claim (digital photos or scans are acceptable)
• Expense claim forms with the date, amount, category, business purpose and VAT amount
• Approval workflow – line manager or director sign-off before payment
• Timely submission – most companies require claims within 30-90 days of the expense
• Segregation of VAT-recoverable and non-recoverable items

The employer must keep expense records for at least 6 years from the end of the tax year in which the expense was incurred.

VAT on Employee Expenses

The employer can reclaim input VAT on employee expenses if:

• The supply was made to the employer (not to the employee personally)
• A valid VAT receipt is held showing the supplier’s VAT number
• The expense is for a taxable business purpose

For expenses under £250, a simplified VAT receipt (showing the total including VAT and the VAT rate) is sufficient. For amounts over £250, a full VAT invoice addressed to the employer is needed.

Common pitfalls include trying to reclaim VAT on:

• Client entertaining – input VAT is blocked
• Train tickets – not subject to VAT
• Car parking – some local authority car parks do not charge VAT

Reporting Employee Expenses to HMRC

Expenses Covered by the Exemption

Since April 2016, most qualifying expenses reimbursed at actual cost are covered by an exemption rather than the old dispensation system. This means the employer does not need to report them on form P11D , provided:

• The employer has a system to check that the expense qualifies
• The amount reimbursed matches the actual cost (or AMAP/benchmark rates)
• Records are maintained to evidence the checking process

Expenses That Must Be Reported on P11D

Any expense payment that does not fall within the exemption must be reported on the P11D. This includes:

Reportable expenses attract Class 1A NIC at 13.8%, payable by the employer.

Expense Claim Fraud

Fraudulent expense claims can constitute gross misconduct and justify summary dismissal. Common red flags include:

• Duplicate claims for the same expense
• Inflated mileage figures
• Personal expenses disguised as business costs
• Claims without supporting receipts
• Patterns of claims just below approval thresholds

A clear expense policy setting out what can and cannot be claimed, combined with a proper approval process, is the most effective defence.

The Expense Claim Process Step by Step

1. Employee incurs a business expense and keeps the receipt
2. Employee submits an expense claim form with receipt attached
3. Line manager reviews and approves the claim
4. Finance team checks VAT treatment and coding
5. Reimbursement is processed through payroll or by BACS payment
6. The expense is posted to the appropriate nominal code in the accounts
7. At year end, non-exempt expenses are reported on P11D

Processing Expenses Through Payroll

Many employers reimburse expenses through the payroll system alongside salary. When processed this way:

• Exempt expenses are paid gross (no tax or NIC deducted)
• Non-exempt expenses are added to taxable pay and subject to PAYE and NIC
• The reimbursement appears on the employee’s payslip

Alternatively, some employers reimburse expenses separately by BACS transfer outside the payroll cycle. This is acceptable but the employer must still track what has been paid and report non-exempt items on P11D.