Many employers have been using fully automated staff expense systems for a while whereas many others have only recently taken the plunge in moving to an electronic or online system and there are still many others processing employee expense claims manually.

Whilst we strongly recommend an electronic expense system for all but the smallest employers as this can greatly improve the level of compliance with PAYE and National Insurance legislation, there is no doubt that many systems implemented and used by employers are completely ineffective and not much better than their previous paper-based methods.

What makes an expense system ineffective ?

The main reasons why an electronic expense system fails to plug some/all of the gaps in terms of PAYE compliance and risk management are usually a combination of, or all of, the following:

  1. The employer completely believing the system provider's sales spiel that the system is fully compliant straight "out of the box"
  2. The employer failing to fix inherent problems with the old system and allowing them to roll into the new one
  3. The employer taking the reactive approach and expecting the system to do all the hard work

 

As with many things in life, especially in relation to IT, an expense system that has not been setup properly, and is not being used correctly, or with incorrect or incomplete data, will always struggle to live up to its expectations.

 

How to ensure the expense system is 'Fit for Purpose' ?

There are many options on the market for employers and each one has its own capabilities, strengths and weaknesses. In general terms, however, we would recommend the following action points for any employer changing to an electronic expense system irrespective of who the provider is or how good their system claims to be:

1) Set up expense codes correctly

Incorrect coding or categorisation of expenses is one of the main causes of non tax compliance with expense systems. For example, all taxable payments need to be clearly identified and separately coded to flow through properly for tax year-end reporting. Similarly, staff and business entertainment costs, including associated costs such as travel and accommodation etc, need to be properly coded to cater for the various tax rules for each.

2) Have clear guidelines

It is absolutely critical that claimants and approvers know exactly what is allowed (and isn't allowed !) under tax and/or company rules and what to do if something is outside of these parameters. Paying something that isn't strictly company policy is bad enough from a cost point of view but if the payment is taxable then it is absolutely vital that the payment is correctly identified and reported in the system as such.

Even if expense policies already exist, it is always sensible to align these with the new expenses system as things will undoubtedly have changed on legislation and practice since these were last updated and they need to be consistent with the capabilities of the new system. Also use this as a good excuse to reinforce the expense rules to all concerned even if nothing much has changed. Get rid of the bad habits from your old system !

3) Tighten the knowledge of the finance team

The buck usually stops with finance when something goes wrong on PAYE compliance and so it is important that your finance person/team is up to speed with tax and NI matters on expenses and areas such as record keeping requirements etc so that they can monitor and use the new system effectively. We are not necessarily saying that the finance team need to be experts in all things PAYE but having a broad understanding of the main problem areas, and knowing what to look out for before seeking more appropriate advice, will help to keep big mistakes to a minimum.

We have used a variety of tools to impart the right knowledge to finance teams in the past, from training sessions to guides to flowcharts. Forewarned is forearmed !

4) Review, review, review

The secret to being as tax compliant as possible in any area of tax is to regularly monitor what you are doing and to make "tweaks" where necessary to resolve any issues or potential gaps. Staff expenses is no different. What started out as working well may change through time due to staff changes, policy changes, business changes, new tax rules, etc and so it is important to proactively manage these changes to ensure the expenses going through the system are still being dealt with correctly.

There is also tax year-end to think about. It's all very well having a super sophisticated system but you need to be able to obtain complete and accurate reports for tax returns such as P11Ds, PSAs etc as well as having robust auditing processes to prove the treatment of all payments in the event of an HMRC PAYE review.

Failure to implement robust and regular auditing of the expense system is asking for trouble in our opinion.

5) Apply for a new P11D Dispensation

Any major change to expense processes will likely invalidate any existing Dispensation agreements with HMRC.

We would always recommend to obtain an updated P11D Dispensation on a full disclosure basis to be on the safe side.

 

Conclusion

Electronic or online expense systems are an important tool for most employers in the battle to comply with the often complex PAYE rules and regulations. We would always encourage employers to move to such a system sooner rather than later as the risks of non compliance can be significantly reduced.

However, let's blow away the myth that this type of system provides a "plug in and go" solution to all your tax compliance needs. It doesn't. Ignore some of the critical areas above when implementing your new system and you could end up with something that is as useful as a chocolate teapot in getting the tax and NI treatment right on staff payments.

A decent system with robust processes and procedures behind it can be very effective however.

As always, please get back to us if you need any assistance in this area.

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