HMRC Expense Fraud: Rising Enforcement and Employer Liability

HMRC Turns Up the Heat on Expense Fraud

HM Revenue & Customs (HMRC) is significantly ramping up its enforcement activity around employee expenses, and UK businesses of all sizes are firmly in the spotlight. From inflated mileage claims to personal purchases dressed up as business costs, expense fraud is no longer treated as a minor administrative oversight - HMRC now views it as a serious compliance failure that can result in substantial penalties, interest charges, and real reputational damage for the organisations involved.

For SMEs in particular, where informal approval processes are common and expense policies are often underdeveloped, the risk of falling foul of HMRC's rules has never been greater. If you're a business owner or HR manager, the time to act is now - not after the letter from HMRC lands on your desk.

Why HMRC Is Increasing Scrutiny

HMRC's increased focus on expenses is part of a broader drive to close the UK's tax gap - the frustratingly persistent difference between the tax owed and the tax actually collected. Expenses and benefits represent a significant chunk of this gap, with many businesses either misclassifying taxable benefits or simply failing to spot fraudulent claims made by their own employees.

HMRC uses a range of sophisticated data-matching tools and third-party data sources to flag anomalies: unusually high mileage claims, suspiciously round-number submissions, expenses claimed on weekends or public holidays. Advances in HMRC's Connect system - which cross-references data from banks, Companies House and other sources - mean that suspicious claims are now far easier to identify than they were even five years ago.

HMRC's Connect system processes billions of data points annually, enabling it to identify expense irregularities that would previously have gone undetected. Employers cannot rely on low audit volumes as a shield.

Employer Liability: What You're Responsible For

Here's the point that catches so many employers off guard. The legal burden of compliance sits primarily with the employer, not the employee. Under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), employers are responsible for correctly reporting and paying tax and National Insurance Contributions (NICs) on employee expenses and benefits.

If an employee makes a fraudulent or non-compliant expense claim and the employer fails to identify it, HMRC may pursue the employer for:

• Unpaid income tax and NICs on the incorrectly processed amounts
• Penalties of up to 100% of the unpaid tax (or more in cases of deliberate evasion)
• Interest on overdue amounts dating back to when the liability arose
• Costs associated with a formal PAYE compliance review or investigation

Ignorance is not a defence. HMRC expects employers to have reasonable controls in place, and a failure to do so is treated as negligence at best and complicity at worst. That's a sobering thought.

Common Areas of Non-Compliance

Understanding where expense fraud and policy breaches most commonly occur will help you prioritise your compliance efforts. The most frequently flagged areas include:

• Mileage claims: Employees overclaiming business miles, using personal trips as business journeys, or simply not maintaining adequate mileage logs. HMRC's Approved Mileage Allowance Payment (AMAP) rates apply, and any payment above these rates (currently 45p per mile for the first 10,000 miles, 25p thereafter for cars) must be reported on a P11D unless a dispensation or PAYE Settlement Agreement (PSA) is in place.
• Subsistence and meals: Claiming for meals that don't meet HMRC's definition of an allowable expense, or submitting personal restaurant bills as client entertainment.
• Home-to-office travel: The ordinary daily commute is explicitly not an allowable expense under HMRC rules, yet it remains one of the most commonly misclaimed items. Remarkably common, in fact.
• Personal purchases: Items such as clothing, home office equipment with personal use, or entertainment claimed as business costs without adequate justification.
• Missing or fabricated receipts: Claims submitted without valid receipts, or supported by receipts that have been altered or duplicated.

HMRC's Expectations: What a Compliant Expense Policy Looks Like

HMRC doesn't prescribe a single format for an expense policy, but it does set clear expectations about what employers should be doing to demonstrate compliance. A robust, HMRC-aligned expense policy should include:

1. Clear definitions of what constitutes a legitimate business expense, with reference to HMRC's own guidance (available in the Employment Income Manual and on GOV.UK).
2. Mandatory receipts for all claims above a defined threshold, with a process for handling lost receipts that includes manager sign-off.
3. A multi-stage approval process, ensuring that no employee can approve their own expenses and that line managers are trained to recognise non-compliant claims.
4. Regular audits of expense submissions, including random spot-checks and periodic reviews of high-volume claimants.
5. Clear consequences for fraudulent claims, referenced in both the expense policy and the employee disciplinary procedure.
6. P11D and PSA compliance, with a defined process for identifying benefits that must be reported to HMRC annually.

HMRC expects employers to demonstrate that they have taken reasonable steps to prevent non-compliant expense claims. A well-documented policy, consistently enforced, is your primary line of defence in any compliance review.

The Role of HR and Payroll Teams

Expense compliance isn't solely a finance function responsibility - HR and payroll teams play an absolutely critical role. HR is responsible for ensuring that the expense policy is embedded in employment contracts, the employee handbook and onboarding processes. Payroll must ensure that any taxable expenses are correctly processed through PAYE or reported via the annual P11D return by the 6 July deadline each year.

Where a PAYE Settlement Agreement is in place, payroll must also ensure the PSA is reviewed annually and that it covers the correct range of minor, irregular benefits. Failing to renew or correctly scope a PSA can result in unexpected tax bills and penalties - the kind of nasty surprise nobody wants.

HR teams should also ensure that the disciplinary procedure explicitly addresses expense fraud. A clear statement that deliberate falsification of claims may constitute gross misconduct and could result in summary dismissal is essential. This aligns with guidance under the ACAS Code of Practice on Disciplinary and Grievance Procedures and provides a defensible basis for action when fraud is identified.

What to Do If You Identify a Fraud

If your business discovers that an employee has been submitting fraudulent expense claims, the correct response involves both an internal HR process and a careful consideration of your tax obligations. Steps should include:

• Suspending the employee on full pay pending a formal investigation, in line with your disciplinary procedure
• Preserving all relevant evidence, including digital expense records, receipts and approval trails
• Quantifying the total value of non-compliant claims, including any associated employer NICs liability
• Considering whether voluntary disclosure to HMRC is appropriate - this can significantly reduce penalties
• Taking legal advice if the sums involved are substantial or if criminal prosecution may be considered

Practical Steps to Take Now

Given the increasing enforcement environment, businesses should treat the following as urgent priorities:

• Review your expense policy against current HMRC guidance and update it where gaps exist
• Audit the last 12 months of expense claims for patterns of non-compliance
• Ensure all line managers who approve expenses have received training on what is and is not allowable
• Check that your P11D submissions and any PSA are accurate and up to date
• Consider adopting expense management software that flags anomalies and maintains a clear audit trail

The cost of prevention is a fraction of the cost of an HMRC investigation. However the pressure isn't going anywhere - with enforcement activity rising and HMRC's data capabilities continuing to improve, now is the time to ensure your business is firmly on the right side of the line.