When should you use actual expense claims or fixed allowances?

Handling employee claims is part and parcel of any typical organisation’s operations since employees often incur business expenses in the course of conducting the company’s affairs. Essential as the ensuing reimbursement process is, it is often regarded as a bothersome chore for both the claiming employee and the personnel processing the claims.

Companies typically spend 24 minutes on average processing employees’ travel expenses alone. To eliminate the arduous task of managing employee business expense claims reimbursement altogether, some businesses have taken to issuing fixed allowances to employees instead, in place of reimbursing actual business expense claims.

Paying fixed allowances no doubt trumps reimbursing actual business expenses where processing hours are concerned. However, there are far more elements involved in corporate business expenses claims than just processing time. To help companies understand which practice to adopt, we examine the expense characteristics and impact on employees for each method.

1. Expense characteristics

For some business expenses, the organisation should be aware that its choice of settlement method could sometimes come with real implications. To illustrate this, let us take a look at the scenario when an employee incurs $999 to purchase a laptop.

• When the actual reimbursement method is used, the company reimburses the employee for the $999 that was spent buying a laptop on behalf of the company. The laptop belongs to the company.
• The fixed allowance method could be used if the company had established practices of paying a specified fixed computer allowance (let us take it as $1,000) to each employee annually. In this case, the employee probably has a choice on whether to purchase a $999 laptop or a $1,200 laptop. Company compensation remains as $1,000 regardless of the amount spent, and the paid allowance of $1,000 is deemed part of the employee’s income. This also means that the laptop belongs to the employee.

In other cases, both methods could be equally acceptable with little difference. To determine which of the two settlement methods might be more suitable, the organisation should first consider the traits of the business expenses that it is looking to address.

Nature of transaction

The nature of transactions could also affect the degree of accuracy and accountability required. Certain business expenses could be subject to statutory requirements that the company needs to comply with and might require that the company use the actual business expense method to ensure statutory obligations are fulfilled.

An example is employee medical fees. Most jurisdictions would have statutory regulations mandating some degree of medical reimbursements to employees. If the company were to adopt the fixed allowance method and payout lump sums of medical allowances in lieu of processing individual claims, it runs the risk of not being able to demonstrate its compliance with the relevant laws.

Amount of business expenses

What is the amount of business expenses expected?

Paying fixed allowances in place of reimbursing actual business expenses typically leads to less visibility and accountability on the business expense incurred. If the quantum of business expenses is above the fixed allowance, companies have to put in place alternative business expense claim policies to reimburse the employees and also ensure that they comply with the company's business expense policies.

Volume of business expenses

How many receipts and invoices would there be?

Let us look at transport expenses as an example. An employee who commutes on multiple transport options daily could easily rack up hundreds of transactions in a month. Unless these transactions could be reliably summarised without manual inputs, paying fixed travel allowances would offer tremendous time savings. 

In contrast, if the transport relates to a single flight of substantial value, reimbursing the actual expense would be more straightforward. Adopting the fixed allowance method may not be suitable and it could prove a challenge for the organisation to determine an appropriate allowance for such isolated or infrequent business expenses.

In general, where volumes of transactions by individual employees are huge and the amount is minimal, paying fixed allowances would be more efficient.

2. Impact on employee

Employees are the most valuable asset of any organisation. It would be wise to take into account the impact on employees in implementing either settlement method.

Time of payment

A benefit of the fixed allowance method is, all parties typically know the amount of allowance payable before the business expense occurs. As such, payment to the employee could even be made prior to incurring the business expense. This would be helpful to employees who may not have the spare cash flow to take on the company's business expenses.

Under the actual business expense method, reimbursement payment to the employee can only be made after the business expense has been incurred and the employee has turned in related receipts and invoices for claims processing. This means that while employees need to fork out their own funds upfront, company settlements to them are typically delayed.

In this aspect, the fixed allowance method would generally be preferred by staff, especially if the amounts involved are sizable.

Ease of claims

Filing actual business expense claims is often regarded as a hassle for both the claiming employee and the administrative employee processing the claims, and this accordingly brings down job satisfaction for both classes of employees.

Needless to say, fixed allowances being constant and not reliant on documentation are generally easier for employees to claim for, and similarly for the company to process.

Tax effects on employee

Choosing to pay out fixed allowances in lieu of actual business expense reimbursement may result in tax effects that may cause monetary leakage for the employee as well as the employer. In Singapore, employees are also required to make mandatory contributions on their earnings to the state pension fund (CPF). 

Other than possible regulatory costs on remuneration, receiving fixed allowances that are above regulatory rates also means that the employee would be liable for higher taxes on their earnings.

WEIGHING THE MERITS

For a clearer overview of the pros and cons of each method, we have summarised some of the factors discussed in the table below.

The fixed allowance method is simple, hassle-free and would generally be preferred by employees. However, it cannot always be applied in all cases, comes with the trade-off of less accountability and visibility for the organisation, and is also more likely to result in incidental costs.

By adopting the fixed allowance method, actual business expense data is no longer required or captured. With a lack of data to assess actual expenditure, the organisation may over time run the risk of formulating budgets based on outdated or irrelevant yardsticks.

In general, although the fixed allowance method could be favoured by employees and companies for the convenience and ease of application, it tends to come with trade-offs in areas of accountability and also presents a higher possibility of hidden costs. 

Organisations may want to look into adopting business expense management solutions to improve current processes and boost user experience. The digitalisation of the business expense management process could help dispel frustration surrounding the traditionally tedious task of claims processing and allow the company to strike a balance without compromising on accountability.

To easily set customised company policies and allow your employees to make expenses claims effortlessly, why not use Navisteps to handle your company’s expense management? Start saving time and effort through business process automation!