How to create an expenses reimbursement policy for contractors

When an expense is incurred by a limited company contractor, personally, it is important to be clear on whether or not that expense should be reimbursed by the company and, if so, what documentation is needed, writes chartered accountant Graham Jenner, founder of contractor accountancy firm Jenner & Co. 

Why is an expense reimbursement policy important? 

If HMRC were to start an enquiry into the limited company, a payment to reimburse expenses that the tax office deem should not have been made, could be regarded by them as a payment that should have had tax and National Insurance (NI) accounted for. 

The failure to do so may result in interest and HMRC penalties being charged, on top. 

‘My accountant sorts all of that’ 

Your current reimbursement policy might be that you make a payment from the company to reimburse yourself for ALL the costs you incur that seem like a business expense. 

You may even have a good feel for what qualifies as a genuine business expense. However, if you don’t document it properly, you may make your accountant’s life more difficult, or even expose your company (or yourself as an individual) to the sort of problems with HMRC, indicated in the previous paragraph. 

Even if you have an accountant with a very ‘can-do’ attitude, you should bear in mind that your adviser will not necessarily be checking your expense claims when they prepare your accounts. It therefore makes sense to try to ensure that claims you make will stand up to an enquiry from HMRC.  

Make a formal claim 

Employees claiming back expenses from their employer, typically, have to submit a formal claim, which is generally approved by their boss. 

In a limited company contractor setting, as you are the director (and so, your own boss), approving your own claim seems unnecessary. However, the approval by a boss is the company’s way of trying to prevent spurious or exaggerated claims.

But there is another part to the claim, which is the signing of the claim by the claimant. They are effectively confirming that a) they incurred the expense, and b) that the expense was incurred for business reasons. 

It is not a bad idea for you to do the same – it may help persuade HMRC, if there is an enquiry, that you had given proper consideration to what you have claimed for. 

Keep receipts (and attach them to the claim form) 

Without a receipt, it may be difficult to satisfy HMRC that the payment was genuinely for business.

You may be able to prove that you incurred the cost – because you can show an entry on your bank or credit card statement, but that doesn’t indicate what the expense was for.

Retaining the receipt and attaching it to the claim form makes it easy to demonstrate to HMRC what the payment was for. It also gives a logical place to keep the receipts. 

If it isn’t clear from the receipt what it was for, don’t be afraid to add a note, and even a brief explanation of why it is a business expense. Better to make the note at the time than have to try to remember months later, if an enquiry is raised. 

‘I want to keep my records electronically’ 

It makes perfect sense to keep your expense claims and receipts in an electronic format. A formal claim form saved in a folder with electronic copies of receipts, if available (or photographs or physical receipts) can be stored together in a folder. 

The aim should be to enable easy retrieval of the breakdown of the amount reimbursed and of the associated receipts. This makes things easier for your accountant, and to deal with HMRC’s enquiry -- if it happens. 

Many accounting software packages now come with the ability to save, and cross reference to, electronic copies of receipts. If you have such a package, consider using that, rather than reinventing the wheel. Your accountant might be able to help with setting up the process. 

There are also expense management apps and software available, though typically these are aimed at companies with a number of employees. You probably won’t need this as a one-person business but, by all means, take a look – it might just simplify the way you deal with expenses. 

Specify what can be claimed 

It is a good idea to have a list of what can be claimed. 

You might want to talk to your accountant to draw up the list. Most accountants are very clear on what can and cannot be claimed (from a tax point of view) but many directors aren’t. Your accountant’s knowledge can be made permanently available if a list is drawn up. 

Notes, caveats, and the flip-side to your list of claimable contractor expenses

Be aware, the list won’t be exhaustive and there needs to be flexibility, so that a genuine business expense isn’t excluded from a claim, just because it hadn’t been written down in advance or envisaged. The list will, though, provide a useful guide, and will help prevent incorrect claims from being made, which your accountant has to spend time on -- trying to rectify them or possibly even justify to HMRC. 

It is beyond the scope of this article to provide such a list, but as a minimum it should include things such as: 

• Mobile phone costs 
• Internet costs 
• Hotel and travel 
• Mileage 
• Parking 
• Visa costs for necessary business travel 
• Meals (either actual costs or HMRC’s Benchmark rates www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim30240 ) 

Examples of what cannot be claimed 

In a similar way to the above claims list, it is worth having some guidance for expenses that cannot be claimed. 

Examples might include: 

• Parking fines 
• Child care or pet care 
• Any personal elements of expenses 

Reimbursed expenses are the most complicated of business expenses 

Most expenses that a business incurs are clearly for business. 

Reimbursed expenses, on the other hand, may be much less obvious. Was the expense for business, or personal reasons – or a bit of each? 

Having a policy along the above lines may provide clarity – and avoid future problems with HMRC.