Best Practices Managing Per Diem Expenses

Using per diem expenses for allowable business travel and entertainment is one way that companies look to reduce the complexity of their financial management. By setting fair per diem rates, employees know where they stand for allowable expenses, allowing for a simpler audit and approval process. If you’re considering moving to a per diem allowance for your business, this guide is for you.

We’ll walk through how per diem expenses work - and also touch on the Wise Business expense card as a smart and low cost way to help your employees manage business spending when they travel.

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What does per diem mean?

Per diem literally means ‘by the day’. A per diem expense describes a fixed amount of money given to employees when they work away from their office or usual location. Per diem expenses are usually intended to cover things like travel, food and hotel costs, although the exact details of any given expense policy is set by the company.

If you’ve got a team member travelling to a client meeting for example, a per diem may be paid for their food on the road, to take the client out to lunch, and for overnight accommodation. The employee will know in advance how much money is available for the per diem allowance and can then spend accordingly.

How does per diem allowance work?

A per diem allowance is paid out by the day or part day. If an employee is away from their normal working location, they may be entitled under a company expense policy to receive a per diem which will cover the additional expenses incurred as a result of needing to travel to a different place. 

The employee may receive this amount in advance of travel, or the sum may be paid out after the travel has taken place. In a per diem system, the employee should keep receipts and records of the expenses incurred, but they don’t necessarily need to submit all receipts for every trip. Submitting a sample is usually enough - lessening the administrative burden for the finance team, too.

How to manage per diem expenses?

Before you start to use per diem expenses, you must have a clearly articulated expense policy. This should include details of what expenses can be covered using the per diem, what happens to unused per diem payments, what level of approval or audit is needed, and so on. 

It is common to find that per diem payments may be set out to specifically exclude some purchases, such as alcohol or other personal expenses which may be incurred during travel. To avoid doubt, it’s best to lay out all of the details clearly and to require employees to read and agree to the policy before incurring expenses.

The broad outline of the per diem management process is likely to look something like this:

1. Travel, entertainment or other anticipated expenses approved - usually the employee will need to check with a line manager that the travel, entertainment, meeting or other engagement is required and approved before booking.
2. Employee spends in accordance with the per diem policy and retain records like receipts - although you may not need to check every receipt for compliance, it is best practice for employees to maintain a thorough record of their spending including receipts.
3. Employee submits spending report and claims per diem allowance - employee submits details of the spending in accordance to the company policy, setting out the costs incurred, why they were needed and supplying receipts where required.
4. Per diem spending is reviewed - the line manager, a member of the finance team or another appointed individual will check that the per diem spending is within policy and according to the approval received in advance.
5. Per diem allowance is distributed to the employee - after approval, the full per diem based on the number of days of travel is given to the employee, ideally as a separate payment rather than as part of the normal pay run.
6. Finance teams will record per diem payments, manage any required tax or NI, and audit as needed

Some common challenges with a per diem payment system include the treatment of partial days of travel, and instances where the expense incurred is higher than the standard per diem for some reason. 

Both of these questions should be covered in your company expense policy. You may, for example, set the standard that partial payments are available when someone is only travelling for half a day - and you could tackle expenses in excess of the per diem amount by asking employees to submit a full record of receipts in this case, for checking.

HMRC per diem rates

HM Revenue & Customs (HMRC) refers to per diem rates as scale rates¹. These are set amounts given to employees to cover common business expenses, where a full audit of receipts is not required.

HMRC does set out benchmark rates, both for costs when employees incur local costs, and when they travel overseas. Or, employers can agree a different scale rate with HMRC by showing evidence of the costs and demonstrating that they are incurred in the line of business.

HMRC scales rates are regularly reviewed and published as part of the HMRC Employment Income Manual which is available online.

How to manage international per diem allowance?

International travel can be expensive, but it’s often necessary when meeting clients, customers, suppliers and so on. To help with anticipating and agreeing the costs of international per diem allowances, HMRC sets out benchmark amounts by country, including city-level details where necessary². 

Even once you've set an international per diem for your business, the process of managing international business spending can be complex and expensive. If your employees spend overseas with their personal bank card, for example, there’s a high chance that they’ll pay a foreign transaction fee of around 3% on every transaction.

If you’re looking for ways to limit the costs of currency conversion on international business spending, a multi currency account from a provider like Wise Business may help. Wise currency conversion uses the mid-market rate, and when you or your team spend with a Wise Business expense card there’s no foreign transaction fee to pay, either. Instead you’ll just pay a low, transparent fee from 0.33% - and you can also set and manage spending controls on an individual level for security.

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Benefits and downsides of per diem expenses

If you’re considering choosing a per diem process to manage employee expenses, you’ll want to weigh up the pros and cons. Here are a few things to think about;

✅Simplicity - Using per diem payments can be far easier for the employee, employer and finance team compared to an expense management process which requires full approvals and checking.

✅Cost savings - As the per diem amount is clearly set out in advance, employees are unlikely to exceed it or to put in additional expense claims, as they know what is and is not supported. 

✅Improved compliance - By making the policy on expenses easier, per diem policies can improve compliance by removing misunderstandings and unintentional errors in claims.

❌Unintended consequences - As the employee can often keep any unspent per diem amount they may try to make savings where it’s not appropriate. For example, saving on a hotel but compromising on a good night’s sleep due to increased travel time, or failing to entertain a client who may expect this. 

❌Additional travel - Per diem costs may make employees more likely to choose in person travel and meetings even where a call or video meeting may suffice, in order to get the additional money.

How to pay per diem rates?

If you’re paying per diem rates for employees it’s advisable to manage expense and per diem reimbursement separately to the normal pay run. In some cases, employers will issue the per diem payment in advance for travel and expenses being incurred. However this can be problematic if plans change or meetings are cancelled for example. 

Many employers prefer to have a third party expense management company support in paying expenses and managing the end to end process in a compliant way.

FAQs - per diem expenses

Are per diems taxable?

The tax treatment of per diems varies depending on the amount paid, and the reason for the payment. As tax can be a relatively complex area it is a good idea to take advice from a tax professional before you start to pay per diem allowances for your business to ensure you’re staying on the right side of the law¹.

What does a per diem cover in business travel?

A per diem in business travel is usually intended to cover the additional costs an employee incurs when working away from their normal workplace. What exactly it covers should be set out in the company expense policy. It’s normal to find food, travel, hotel or other accommodation and incidental additional costs are included.

How do per diem rates vary for international versus domestic travel?

Because the costs of daily expenses, food, hotels and travel can vary a lot depending on where in the world you are, international travel will often have a different per diem expense amount set out compared to domestic travel.

As well as a per diem, another possible approach to international business spending is to issue employees a card such as the Wise Business expense card from Wise Business, which allows for low cost overseas spending with the mid-market exchange rate. Spending is deducted from the central Wise Business account, which means the employee is not out of pocket, but the manager can still set limits on spending and withdrawals to control spending remotely.

What happens if an employee’s actual expenses exceed the per diem amount?

Generally a per diem is paid as a flat amount which must cover all allowable incurred expenses, according to the business expense policy. If an employee spends more than the amount specified in their per diem, the remainder of the expense will be the employee's responsibility as an individual. Companies may choose to include a process in the expense policy to allow employees to apply to reclaim excess expenses in exceptional circumstances.

What records do employees need to keep when receiving per diem?

Employees must retain records of all business spend as specified in the company expense policy. The policy may not require submission of all receipts and invoices, but usually some audit process will be in place, which requires the employee to retain all relevant information for sample checking.

Wise Business expense cards: international expenses made easy

If your business operates internationally and your employees are regularly spending time abroad for work, Wise Business expense cards could be the ideal solution. 

These contactless international debit cards work for spending and cash withdrawals in  150+ countries worldwide, with no foreign transaction fees or subscription fees. 

Whenever someone spends or withdraws cash overseas, the currency is converted at the mid-market exchange rate, with just a small conversion fee to pay. 

There’s also 0.5% cashback paid on all eligible spending. 

Once you have a Wise Business account, you can order unlimited expense cards for just a one-off fee of £3 a card. You can add employees to your account, with controlled access - and you get full control over spending their limits. 

What’s more, it’s easy to integrate Wise with your accounting tools, and your accountant can view team spending for smarter collaboration.

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Using per diem expenses rather than having a line by line expense claim process can be simpler to manage and reduce the administration required. However, it’s important to clearly set out the per diem allowance and the items it is intended to cover in your expense policy to ensure understanding and reduce the chance of accidental misuse of the policy. It’s also a good idea to set per diem rates after taking tax advice based on your specific business requirements, to make sure you’re using a fair rate while complying with the relevant tax and other legal requirements. 

Sources used in this article:

Sources last checked December 18, 2024