It’s a “rites of passage” experience that every growing business will eventually have to go through…the dreaded HMRC audit.
It starts with a letter dropping on your company doorstep, informing you that HM Revenue and Customs (HMRC) need to look through your financial records to ensure tax compliance.
You can minimise the chances of triggering this kind of audit by meeting HMRC reporting deadlines and avoiding any errors or information blackspots but even so, a percentage of audits are still randomly chosen.
When it does happen, it can be a long and stressful experience as expert auditors begin the process of scouring through your information on the lookout for any errors, oversights or evidence of fraudulent activities.
One of the areas they will pay particular attention to is your employee expenses. It’s a part of company finances where many get caught out, especially when a growing business starts struggling to keep proper records of costs.
If HMRC find anything wrong, you’re liable to pay back costs, with added interest and possible penalty charges. If inspectors suspect deliberate dishonesty, they may carry out a criminal investigation with a view to prosecution.
So how do you get through a HMRC audit? Here’s a guide:
Keep immaculate records
When you receive the audit letter from HMRC, you will be asked to supply any records relating to employee expenses. These will be forensically examined to ensure you are meeting all tax requirements.
They will target in on any reimbursement costs that have missing, incorrect or misleading information. They need to see proof that costs have been incurred, along with the how, why and where of each claim.
It’s the kind of detailed information that’s automatically stored with a cloud-based system such as webexpenses. With digital data on every aspect of expenses, it allows businesses to provide HMRC with a reassuring level of information.
The way employee expenses are handled by HMRC went through a big change in 2016. The old P11D dispensation system was replaced by exemptions – this places greater responsibility on companies to decide which costs need to be reported to HMRC.
The reimbursements included in the reporting exemption include business travel and subsistence, business entertainment and any professional fees or subscriptions.
You need to make sure that any costs you set against income to reduce your taxable profits are “wholly and exclusively” for the benefit of your business.
An auditor will always want to see proof to show that each expense cost has been incurred. The absence of this supporting information will trigger alarm bells for an auditor, with credit card slips and “lost receipt” notes not sufficient.
Digital expense management systems provide a powerful way for a growing business to keep on top of this expense paperwork. Webexpenses provides employees with a smartphone app which allows any paper receipt they receive to be instantly turned into a digital format.
It provides a quick and easy way for workers to provide proof of costs while removing the administrative burden caused by finance teams having to manually process a monthly mound of expense claims.
Mind your mileage
Mileage costs pose a particular risk during an expense audit. It’s an area that has been notoriously difficult to control with distances travelled liable to be falsified and exaggerated.
An auditor will want to be reassured that mileage expenses are accurate and, “necessarily incurred in the performance of the duties of the employment”.
Digital systems have transformed the way business can provide this information with a smartphone app able to track the exact distance and route of any road journeys.
It’s worth remembering that as well as digging into the finder details of your financial records, auditors also take a general overview of the accounting systems a company has in place.
They want to see evidence of a set-up that allows an organisation to meet its PAYE responsibilities; to accurately monitor and record each employee expense and to enforce compliance policy.
It’s something that a cloud-based systems allows a growing business to achieve. With an understanding of the tax regulations, it’s a powerful way to minimise the risks posed by a HMRC audit.
It provides a way of managing expense reimbursements that allows a business to be permanently prepared for that moment when a letter from HMRC drops on the doorstep.
Webexpenses provides a smarter way to manage employee expenses and scale-up your business. Find out for yourself by requesting a free demo.
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