Considerations for your Travel Allowance and VAT Configurations – and preparing for 2021!

For most of the world, 2020 may long be awarded the title of “annus horribilis”, or “horrible year”, but whether this year has been horrible or even merely tolerable, one thing is certain, it is drawing nearer to its close. While many yearn for the prospects of a brighter year ahead, we cannot yet close the door on 2020. As many of us know, we must prepare for tomorrow by tidying up our today. And so, it is with our expense systems, policies, and processes.

During the last quarter of each calendar year, we should take a moment to reflect on the things we have learned in its’ course and prepare for the prospects of the next. In the travel and expense space, this may mean that we:

While each of these in their own right deserve exploration and definition, I would like to focus on the last point – system configurations. So many of us are guilty of spending time defining policies and processes without an eye toward the ramifications of system configurations. In the T&E world, our policies and processes should complement our configurations (and vice versa).

So how can we achieve this and more specifically, what do we need to look at or consider during these last few months of the year?

Travel Allowances:

For most businesses, the decision to use / reimburse against a travel allowance (also commonly referred to as a Per Diem) is a matter of simplifying policies for employees, or accounting for expenses in a general and clearly defined manner. Simply put, it is often a decision that we find companies make based on processes and less on critical factors that should drive the decision. But why is that? Why do we often make this decision based on how we (or our employees) process expenses? The answer is that the rules and reasons requiring the use of an allowance are complex and often very confusing.

Consider two fundamental points to Travel Allowances:

Statutory requirements are often easy to point to: we know governments around the globe today reference legislation or tax code (or employment code) to outline which rates to use and when, but this is not always as clear as one would expect.

In some countries for example, it is important to understand not only what the fiscal requirements are for utilizing allowances, but also what ramifications, if any, exist (or conflict as may be the case) with works council directives or collective bargaining agreements. In a handful of countries, there may be an option to reimburse actual expenses, even where the government outlines the allowance rates, but only when a works council mandate or collective bargaining agreement allows for such.

If a country does not specifically require an allowance, and there is no local mandate as such (whether from a local works council or collective bargaining agreement), what would be the benefit of having an allowance?

On the surface “up to” policies tend to take a universal approach to expenses, but this is more complicated in practice. “Up to” limits that are defined in policies are difficult to maintain in expense systems like SAP Concur, primarily because they are generally defined as “audit rules” that trigger either messaging or hard stops when an employee exceeds the amount. This does not mean or suggest however that “up to” amounts are allowed or accepted universally. An employee based in Tokyo for example, may have a completely different expectation or need than an employee based in Bangalore, or even Seattle for that matter. Add in fiscal requirements based on reimbursement jurisdiction, taxable/non-taxable amounts, fringe benefit or benefit in kind classifications on amounts that the authorities deem “above usual and customary”, and well the whole thing becomes complicated.

Herein lies the problem…. if maintained by audit rules, the combination of rules required to manage this would be taxing to say the least (no pun intended).

So, if paying actual expenses is complicated, then why not just move to an allowance for everyone?

Well, this too poses a problem. In some countries, when we elect to pay the allowance, we are required to reimburse at government rates, while in others we can reimburse in excess of government rates as long as we report the overage, and still in others, we may be prohibited from reimbursing an allowance at all because all expenses (including meals) must be evidenced by receipts.

Employees may also find allowances to be unfair. If an allowance is set too low for a city, it will likely raise concerns for employees, while a rate set too high may indeed prove costly for the employer. The balance therefore is difficult to manage outside of the context of government published rates.

The complications of allowances are compounded when we add cultural requirements into the mix. In this regard, I do not mean the national culture but rather municipal and corporate cultures. Some businesses for example may say that it is better for them to follow one practice or another because that is how other businesses in their area operate, and this keeps them competitive in attracting or retaining employees.

Ultimately, the decision even where easy to make, is often complex to maintain. Maintaining audit rules, or travel allowances is a task that should not be taken lightly, or ignored….the results of doing so may ultimately lead to penalties and undoubtedly further scrutiny for future financial audits.

VAT:

In concert with regular travel allowance configuration changes, we recommend taking the time to review consistently changing requirements for recording and reporting Value Added Tax (VAT).

VAT changes, along with travel allowances, are crucial in maintaining controls, and reducing risk and liability associated with financial audits, and like travel allowances, the rates for VAT may change regularly.

Having up to date VAT rates configured in your expense system will ensure that not only are you reporting the correct amounts, but that you are fully recognizing your reclaim potential.

As the year draws nearer to a close, it may prove prudent to review your expense configuration to ensure you are limiting your risk and maximizing the value of your expense system. Regardless of which system you use, be sure to put your policy, configuration and systems to work for you by ensuring they are capitalizing on potential while remaining compliant for the ever changing statutes of tomorrow.

Whether you are trying to decide which reimbursement method to follow (allowance or actual), have questions about specific country requirements, or you need support in reviewing your configuration, Lyndon Group remains abreast of the complex rules and changes required for each country and are here to help you navigate the road that is best suited for your business.

With over 20 years in practice, our team of dedicated professionals has a deep knowledge of expense process, requirements, and systems to help provide context that allows you to steer your business into the new year ahead.

Written By:

Dereck Johnson

Senior Advisor