How to set up a business expenses policy for your company

Why you need a written expenses policy

Without a written expenses policy, every expenses claim is a negotiation — and the result depends on who submits it, who reviews it, and what mood everyone is in. Directors and employees spend on the company's behalf with different assumptions about what's acceptable, what the limits are, and what evidence is needed. A written policy replaces those assumptions with explicit rules, applied consistently.

A documented policy also matters for tax. HMRC distinguishes between genuine business expenses (fully deductible and non-taxable) and benefits in kind (which may attract Income Tax and NIC and require reporting). A written policy that sets out allowable categories, receipt requirements and approval steps demonstrates to HMRC that your expenses process is controlled. Without it, HMRC has reason to treat expenses more sceptically on enquiry. This page is general guidance — confirm the tax treatment of specific expenses with your accountant.

Define the main expense categories and limits

Cover every category of spend that regularly arises and set a clear per-claim or per-day limit for each:

• Travel — mileage (at current HMRC advisory rates for business travel, confirmed annually), public transport fares, taxis. State whether first class is permissible or economy only.
• Accommodation — a reasonable nightly limit for hotels when staying away on business. HMRC does not prescribe a specific cap but the policy must be commercially justifiable.
• Meals — a daily subsistence limit for meals taken during extended business travel (HMRC provides benchmark rates for overseas travel; domestic daily limits are set by the employer). Specify that client entertaining is a separate category.
• Client entertaining — note that entertaining clients is generally not deductible for Corporation Tax, though VAT-registered companies can claim input VAT on certain entertainment costs. Employees must understand the distinction.
• Subscriptions and training — which professional subscriptions and training costs the company will pay, and whether prior approval is required.
• Home working — where employees work from home regularly, the basis on which any contribution to costs is made.

Set the approval and evidence requirements

Claims without evidence cannot be processed, and processed without approval cannot be controlled. Build both into the policy:

1. Receipts for all claims — no receipt, no reimbursement. This is the baseline. Digital photos of receipts are generally acceptable provided they are legible and complete.
2. Description of business purpose — especially for meals, travel and entertaining. "Business lunch" is insufficient; "client lunch with [company name] to discuss [project]" is what HMRC expects to see.
3. Approval step — claims above a threshold require line-manager or director approval before submission. Sole directors reviewing their own claims should have a second authorised person (bookkeeper, accountant) review them periodically.
4. Submission deadline — a maximum period after the expense was incurred (e.g. 30 days). Late claims create payroll timing problems and audit complications.

Where your company uses expenses software (Expensify, Dext, Pleo), the tool can enforce receipt requirements and approval workflows automatically — reducing the administrative overhead on your finance team.

Handle non-allowable expenses and benefits in kind

Not all expenses the company pays on an employee's behalf are free of tax. Some are benefits in kind — things of value the employer provides that are not pure business expenses. Common examples include private medical insurance, gym memberships, company cars used privately, and gifts above the trivial-benefit threshold.

Benefits in kind must be reported to HMRC annually on a P11D form (due by 6 July after the tax year), and the employee pays Income Tax on the value. The company pays Class 1A NIC. Some benefits can alternatively be processed through a PAYE Settlement Agreement (PSA), where the company bears the tax cost on the employee's behalf. This is often preferred for minor or irregular items where individual reporting would be disproportionate.

Your policy should identify which benefits the company provides, how they are reported, and whether employees need to be aware of a personal tax consequence. Confirm the current reporting rules and trivial-benefit exemption limits with your accountant each year — the rules are specific and the thresholds change.

Communicate, enforce and review annually

A policy no one knows about might as well not exist. Communicate it clearly when employees join, when it changes, and briefly at the start of each tax year. Make the current version easy to find — a shared document folder is sufficient. Key points worth reiterating:

• The receipt requirement is absolute, not a guideline.
• Approval must happen before reimbursement, not after.
• Personal expenses charged to the company are not a grey area — they are either repaid, treated as a benefit in kind, or recorded as a director's loan drawing, each of which has tax consequences.

Review the policy annually in April, when HMRC advisory rates and threshold limits update. Check that the expense categories still reflect how the business operates — companies evolve and a five-year-old policy may no longer cover the categories people actually incur. A well-maintained expenses policy is a small administrative effort for a significant reduction in tax risk and operational friction.