Adam Reynolds, CEO of webexpenses, outlines why a digital expense management system has become an essential tool when dealing with HMRC audits or investigations.
It starts with the delivery of an ominous looking brown envelope. Inside will be a letter from HMRC kindly informing you of a forthcoming audit or investigation.
For finance professionals, it marks the start of a stressful and difficult period as tax officials begin searching through financial records and foraging for errors, inconsistencies and compliance breaches.
With routine audits occurring once every four to six years, it’s more a case of when, not if, it’s going to happen. And any kind of reporting irregularities can increase the chances of an HMRC investigation.
Being better able to handle this is a key reason why more organisations are moving over to digital management methods. It’s not just the speed and efficiency they provide, but also their compliance safeguards.
The advantages provided by digital ways of working can be clearly seen with employee expenses. It gives companies the ability to operate in a way which minimises risks with HMRC. Here’s a look at why a digital expense management systems has become such an essential tool:
The biggest mistake a company can make when dealing with tax audits is to wait until one happens before addressing any problems. The most effective approach is to enter the mindset of being permanently prepared, to ensure you have a robust and compliant system in place which ticks all the required boxes for HMRC.
This is something a digital system provides, giving you the tools to manage and control employee expenses in ways not previously possible with traditional paper-based set-ups. With fast and automated processes, finance teams are able to focus on effectively monitoring and policing compliance.
With a robust policy and the tools required to maintain it, businesses of all shapes and sizes now have the ability to put in place an expenses regime which minimises the risks posed by a tax audit or investigation.
What tax officials are looking for during an audit is proof that a business has taken all reasonable steps to ensure tax compliance. It’s when this evidence isn’t available, or it’s patchy and incomplete, that suspicions are raised.
The problem in the past has been the bulk of administrative work that was required to create, check and store the kind of detailed information that HMRC want to see. It’s something that a digital system automates - removing the need for manual tasks.
Properly configured, a digital system creates quality data on every aspect of a claim, with each step of the process digitally timestamped and all relevant information collated and made instantly accessible.
To minimise risks during an audit your organisation needs to be able to have effectively policed its own expenses policy. You need to be able to make sure that approved claims are legitimate business expenses.
Digital systems provide a powerful set of tools to do exactly this with real-time monitoring allowing finance teams to identify problems the moment a claim is made. Companies can set caps and limits for different expense categories with alerts sent to the finance team whenever these are breached.
Employees can also be issued with on-screen policy reminders and notifications to help ensure claims are legitimate. It allows for a more preventative approach to compliance rather than relying on problems to be retrospectively rooted out.
Petty cash control
One of the common pitfalls companies fall into during a tax audit is with petty cash. Traditionally, this is an area of company finances that has operated separately from the main expenses set-up.
It means that costs are often processed without adequate checks and balances, making petty cash one of the most susceptible areas to errors and fraud. A 2015 survey by Argos retail group estimated that UK companies lose £1.8bn each year to the problem.
A digital system allows companies to integrate any petty cash set-ups within an organisation into their main expenses system. It means they can be handled with the same level of control as any other expenses, minimising the risk of any nasty surprises being unearthed during an audit.
So while undergoing an HMRC audit is never going to be a pleasant experience, digital systems do provide practical ways to minimise risks and lower stress levels. While the main reason companies move to digital systems may be speed and efficiency, the long term compliance benefits can be viewed with equal importance.