Best practices for an expense reimbursement policy

In an ideal world, business expenses would all be paid directly by the business, with an invoice or receipt easily accessible. But unexpected out-of-pocket company expenses are an unavoidable part of managing a business. Projects linger, client requirements change, and work trips get extended. 

This can mean expenses that weren’t part of your original plan are accrued, creating even more work for finance teams. UK businesses currently lose 12 working days per year managing expenses manually.

However, with a robust expense reimbursement policy in place, unplanned expenses needn’t derail your finances or create an administrative nightmare.

This guide will demonstrate how to manage business expenses with an employee expense reimbursement policy that’s simple, effective, and helps your team to work with confidence.

What is an expense reimbursement policy?

An expense reimbursement policy aims to provide transparency for employees who have to pay out-of-pocket expenses related to their work. It is a set of guidelines that dictates what out-of-pocket purchases your team can make on behalf of their company, and how and when they will be paid back for work-related expenses. This transparency helps to build trust with workers and ensure that if they need to purchase something to do their job, they can do it quickly to avoid interruption to work.

Any business in which a person makes a purchase on behalf of the company using personal funds (cash, personal credit card, etc.) instead of a corporate credit card should have an expense reimbursement policy.

An effective expense reimbursement policy must look beyond travel. Out-of-pocket expenses can happen anywhere in your organisation, whether a desk-based colleague is purchasing software or a team member is traveling for work. Expanding your policy to cover all roles prevents financial blind spots, protects your budget, and reduces the shadow work of manual tracking across the company.

Example scenarios

Desk-based worker

Vikram urgently needs to purchase a specialised software subscription to complete a time-sensitive project. He does not have access to a company card, and it would be much faster for him to purchase the subscription rather than have a manager do it for him. So he can get to work immediately, Vikram uses his personal debit card to buy the subscription and files an expense report with a receipt.

Work traveller

Pat is attending a two-day industry conference when they are unexpectedly invited to a networking event, which costs £25 for a ticket. Pat has already used their daily per diem amount for food and drink, as their company credit card has a strict daily limit. Pat uses their own money to pay for the networking ticket and submits it as a business expense on their return.

Out-of-pocket business expenses are usually more common in roles that involve a lot of work travel. Being on the go brings a higher risk of unexpected purchases like cab fares or last-minute supplies for a hosted event.

Travel disruption also plays a part. UK companies spend more than £1.6 billion annually on additional travel expenses due to cancellations or other disruptions. This works out to about 4% of each country’s annual business travel budgets.

Why do you need an expense reimbursement policy?

Expense reimbursement policies are all about smart financial management, keeping everyone on the same page, and empowering employees to get the job done efficiently.

Here’s how it could help business efficiency:

Employees know exactly what’s covered

With an expense policy in place, teams know exactly what they can claim for. They won’t have to check with the finance team every time they need to make a payment, and you minimise the risk of people unintentionally breaching company guidelines.

It makes employee spending more predictable

For the person managing your business’s finances, whether it’s the office manager or a designated finance officer, having predictable expenses is key to reducing shadow work. According to The Cost of Shadow Work report, employees waste an average of 7 hours a week on these non-core tasks. 

Restrictions such as limits on hotel room costs or specific guidelines for meal expenses help control costs and avoid unanticipated out-of-pocket expenses.

You reduce the risk of expense fraud

Every business is at risk of expense fraud. This is where workers deliberately inflate reimbursements and submit inaccurate expense claims. 

According to the latest CIFAS Workplace Fraud Trends Report, almost one quarter (24%) of workers admitted to knowing someone who has committed expense fraud in the past year, making it the most witnessed fraudulent behaviour.

A well-written expense policy, as well as an expense management system that flags irregularities, will help you identify anything suspicious. 

It helps to ensure tax compliance 

Having full transparency of expense claims will help you remain compliant and maximise potential tax benefits. There are guidelines for reimbursing employees so that expenses don’t count as taxable income. These expenses need to meet all of HM Revenue and Customs’ (HMRC) criteria, such as being reported to employers promptly.

What to include in an employee expense reimbursement policy

Follow these best practice guidelines to create an employee expense reimbursement policy that suits your business:

Outline how employees should report expenses

This should act as your team’s first port of call when they have a business expense to submit. Firstly, workers need to save their receipts so the finance team has full visibility of the transaction. Paper workflows can be risky, so we would recommend instructing your team to adopt a digital-first approach to expense reporting.

Rather than expecting workers to collect paper receipts, which are easily lost and damaged, use a spend platform like Perk to capture receipts at the point of purchase.

The mobile app enables employees to photograph receipts the moment something is purchased. The image is uploaded to the platform and automatically matched to the corresponding transaction, and the expense is created without the need for manual data entry.

You should also set deadlines for filing expense reports so that you can reimburse workers on time.

List how you will deliver expense reimbursements to workers

Set expectations for when and how employees will be reimbursed. This will help to build trust and reassure your team that they won’t be out of pocket for long. For example, you could reimburse your team via direct deposit when they get their payslips, or you could commit to paying expenses within 30 days of submission. It’s just a matter of deciding what works best for your business.

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Define what an acceptable business expense is

Although what counts as a business expense might seem obvious, it will make things a lot easier in the long run if you outline it in your expense reimbursement policy. Grey areas can occur, particularly on work trips. Will you let your workers make expense purchases of alcohol? Is there a spending cap on taxi travel? Do you want to define expenses by category, such as client entertainment, travel, food and drink?

Be sure to outline procedures for handling cancellations or additional costs that may arise during travel.

It can also be useful to list common reimbursable and non-reimbursable expense examples

By defining things like this at the outset, you’ll avoid confusion and instances of non-business expenses being submitted.

Clarify exchange rates 

For work travel expenses in other countries, outline that the exchange rate that will be used for the reimbursement is the one from the day of the purchase. This is why accurate receipt management is key.

Consider employee wellbeing during work travel 

Any policy relating to work travel should be led by employee wellbeing considerations. When it comes to travelling for business, not everyone finds it an enjoyable experience. Statistics from World Travel Protection show that 46% of business travellers reported experiencing increased stress and burnout from frequent trips. If there are ways you can make work trips more comfortable, and the budget allows, you can include these in your expense policy. For example, if a trip is longer than one week, you may want to let your team expense gym visits. 

Outline the consequences of failing to stick to the policy

By setting out the consequences for failing to abide by the company’s expense reimbursement policy, workers are clear on the process they can expect if they continuously flout the rules.  

Prioritise clarity and test it out 

Your company’s expense reimbursement policy must be clear, specific, and free of confusing jargon. Directly explain the business purpose of the policy to prevent misunderstanding. Before launching your policy, consider testing it on a focus group. Are work-related expenses clearly defined? Can your team get access to the company credit card instead of paying out of pocket? Get feedback to determine whether or not the policy has clauses that can be misinterpreted and make adjustments as needed.

Automate your expense reimbursement process with Perk

Perk’s intelligent travel and spend platform can automate your expense reimbursement process for speed and efficiency.

Receipt collection is quick, transactions are easily reconciled, and out-of-policy expenses can be flagged instantly.

See the platform in action by requesting a demo today.