Expenses are more than just a recording of the outgoing cash flow of your business. Expenses also include amounts that are claimable against tax. When recorded and tracked correctly, expenses provide a clear indication of the health of your business.
Expense checking is generally fairly straightforward; it involves going through the recorded claimable expenses for business purposes. Travel is a common source of expenses such as petrol, accommodation, meals, etc. For companies that work in an industry that requires travel, this is a crucial part of managing finances.
Tracking expenses is so important, that HMRC has outlined expense payment management and how an expense checking system should operate effectively, based on the size of the business, in two internal manuals: EIM30270, and EIM30275.
Expense checking for sole-traders
If you’re a one-man (or woman) show, you would fall under HMRC’s ‘Model D’, which outlines that expense checking should be undertaken by an impartial third party. This could be an accountant, who might not look through each and every expense payment but will instead take a sample to check.
The check will involve ensuring that conditions were met on any exemptions. The involvement of a third party is important as the checks should be performed without notification. Meaning checks are random - both in timing and which expense they concern.
Expense checking for small businesses
Small businesses fall under ‘Model C’ in the HMRC manuals (which means your company has more than 1 but fewer than 100 employees). In this situation, the employer takes responsibility for checking the expenses as reported by the employees.
It’s generally accepted that an employer will check approximately 10% of the expenses claimed by employees to ensure that they meet the requirements and were incurred while the employee was fulfilling duties for the company.
As an added measure, HMRC will ask for how the checks are randomised, and your system for determining that 10% was checked. For this reason, it’s also important to hold on to all receipts for at least 12 months.
By providing this information, expense payments can be provided under ‘scale-rate payments’, in which an employer provides employees with a set amount of cash to be used for expenses that are encountered on the job.
Expense checking: your approach
Depending on the size of your business and the amount of related expenses, implementing an expense checking process is a useful measure when it comes to claiming expenses and reporting to HMRC.
Learn more about what expenses you can claim as self-employed: ‘Self-employed expenses: what can you claim?’
Debitoor invoicing software makes it easier to introduce and follow-up with an expense checking system. If you’re a sole trader, you can invite your accountant to collaborate on your accounts, giving them read only access to your expenses, making it even simpler for them to ensure they are up to scratch.
It also gives you the option to match your expenses to your bank statement uploads, helping you to keep track of where your money goes. On one of the larger plans, Debitoor will even take care of the matching automatically, allowing you to instantly see any unmatched expenses.