Can you prove you’re recording business entertaining costs correctly?

HMRC are asking companies to confirm they have robust controls in place to record employee business entertaining expenses claims – do you?

‘Nudge’ letters issued to Large Businesses

A current HMRC ‘nudge’ letter campaign focuses on the risk that employees misclassify business entertainment as travel and subsistence when submitting their expenses claims. Business entertaining costs are typically non-deductible for VAT and corporation tax purposes, so if this happens and it’s not detected and corrected, errors can arise in the employer’s corporation tax and VAT filings. HMRC are asking businesses to confirm whether their systems and processes for managing these expenses are robust, and to identify any related inaccuracies in their corporation tax and VAT returns. 

Employers who receive one of these letters should consider a wider review of their processes before responding, as any weaknesses in this area might prompt a broader HMRC review – particularly in relation to employment tax compliance. This article considers what employers should do to manage their compliance risk, regardless of whether they have received a ‘nudge’ letter.

What’s the HMRC initiative?

HMRC are asking companies to check their processes for recording business expenses, as they have identified that some employees are incorrectly recording business entertainment expenses as work-related travel and subsistence.

HMRC’s letters focus on the corporation tax and VAT implications of misclassifying business entertainment expenses as travel and subsistence as, in summary, this can result in businesses claiming corporation tax deductions, and reclaiming VAT as input tax, when these are not in fact due.

However, depending on the responses HMRC receive, it is possible these reviews might be extended, particularly to employment tax compliance. Companies that receive a letter from HMRC should bear this in mind when preparing their response.

What specific actions do HMRC require?

HMRC’s letters require a response which specifically:

  • Confirms whether the company is confident that its business entertainment and travel & subsistence employee self-reporting arrangements comply with the corporation tax and VAT rules;
  • Gives details of the current processes for recording business entertainment and travel & subsistence expense claims;
  • Confirms whether any changes to their business entertainment and travel & subsistence self-reporting systems and/or processes are required and – if so – details of the changes to be made; and
  • Confirms that filed corporation tax and VAT returns will be reviewed for any inaccuracies, and that any relevant corrections will be notified to HMRC.

What should companies do?

Companies that receive a business entertaining expenses ‘nudge’ letter should carefully consider their position before responding and may wish to seek specialist advice or assurance. Responses that do not demonstrate a sufficiently rigorous review and assessment of the company’s position might prompt further questions from HMRC – potentially extending into additional areas of tax compliance. Companies that have not received a ‘nudge’ letter should also take this opportunity to consider their systems and processes proactively.

Questions to consider include:

  • How can we demonstrate that our expenses processes and controls are robust and reflect best practice?
  • How do we ensure that our expenses policy continues to reflect the business model and therefore remains fit for purpose – is it time for an update?
  • How do we know whether our expenses policy is clear and understood by all employees?
  • How easy – or otherwise – would it be to assemble evidence on these points should HMRC undertake a review?
  • Is some form of external review required to give us independent assurance (this might be a particular consideration for companies within the Senior Accounting Officer regime)?

How can KPMG support you?

We can help guide you through the best practice for risk controls and processes to support your business and develop more robust systems to withstand HMRC’s scrutiny. Please contact the authors of this article, or your usual KPMG in the UK contact, to discuss further.