How can you grant a fixed expense allowance to staff?

A fixed expense allowance for staff is permitted, but only if you substantiate the amount in advance with an investigation into the actual costs and repeat this substantiation as soon as circumstances change or the Tax and Customs Administration requests it. If you fail to do so, the Tax and Customs Administration may classify the allowance as wages or charge it entirely against your tax-free allowance under the Work Expenses Scheme (WKR). Below, you will find a step-by-step guide on how to correctly grant, substantiate, and adjust a fixed expense allowance, so that you avoid the administrative hassle of individual receipts without incurring any tax risk.

What is a fixed expense allowance?

When your staff incurs work-related expenses — such as parking, mileage, telephone and internet costs, or minor representation expenses — they are entitled to reimbursement. In practice, this means a stream of receipts and expense claims that must be checked and calculated anew every month. A fixed expense allowance is a predetermined, recurring amount that covers these costs in a single lump sum. For you as an employer, this saves a great deal of administrative pressure; for the employee, it means certainty and no more hassle with individual expense claims.

Important to understand: an expense allowance is, in principle, not wages, because it concerns the repayment of incurred costs. Consequently, an allowance may, in principle, only actual costs . If the fixed allowance is too generous, a tax problem arises. If you agree on an allowance in the terms of employment, be sure to document it carefully; you can read more about this in our expertise on employment law.

Why the Tax and Customs Administration is scrutinizing fixed allowances

Fixed expense allowances fall under the Work Expenses Scheme (WKR). Within this scheme, you can provide certain allowances tax-free via so-called targeted exemptions (such as travel expenses or home office expenses) or via the free allowance. This free allowance is a budget that you may spend on your staff tax-free each year; it is calculated as a percentage of your total taxable wage. The percentages and threshold amounts are determined annually, so always check the current rates with the Tax and Customs Administration or your accountant before setting up an allowance.

The sticking point lies in the substantiation. For a fixed expense allowance that you specifically wish to keep exempt or tax-free as an intervention (intermediary costs) , you are required to substantiate the amount in advance with an investigation into the actual costs. If this substantiation is lacking or the allowance is too high, the inspector may classify the excess as wages or charge the entire allowance against your tax-free allowance. If you subsequently exceed that tax-free allowance, you will pay a final levy on the excess. A solid file is therefore not a formality, but your most important protection during an audit.

Step 1: Map historical expense claim behavior

The most reliable way to substantiate a fixed allowance is to map historical expense claim behavior . First, have the employee keep all receipts and supporting documents for a representative period, and assign a variable expense allowance during that period based on actual costs. In practice, a research period of approximately three months is often used as a starting point, although the law does not prescribe an exact timeframe. From this data, calculate average amounts per type of expense item.

Based on those averages, you determine the amount of the fixed expense allowance. Clearly break down that amount into the individual expense categories (for example, this much for travel expenses, this much for telephone, this much for representation), providing a description, the amount, and the type of exemption or intermediary costs for each category. Crucial: this specification must in advance , i.e., before the first allocation. The Tax and Customs Administration will not accept substantiation prepared only afterwards.

Step 2: Draft regulations

A fixed fee covers a fixed package of costs, but in practice, unexpected or incidental expenses always arise. Therefore, clearly stipulate in regulations :

• which cost items the fixed fee covers;
• for which additional costs the employee may still claim separately;
• the practical arrangements: how often the amount is paid, what happens in the event of long-term absence or termination of employment, and when the amount is reviewed;
• that you retain the right to random checks and adjust the compensation.

Such regulations not only strengthen your tax record, but also prevent discussions with your staff about what is and is not covered by the compensation. You typically include these types of agreements in your terms of employment or employee handbook.

Step 3: Conduct a periodic sample

Providing substantiation is not a one-off action. The Tax and Customs Administration may request up- to-date substantiation , so you must be able to demonstrate that the reimbursement still aligns with the actual costs. Therefore, conduct a sample check periodically—in practice, often at least once a year . To do this, employees temporarily continue to keep their receipts, even though they no longer need to be processed in your regular records.

During the sample, ensure that you:

• a sufficiently long period , for example the receipts for a full month, so that the picture is representative;
• not only adds up, but also assesses whether the costs are actually related to the work;
• neatly records the outcomes, so that you have a substantiated file immediately available during an audit.

Step 4: Adjust the fixed expense allowance

Based on the sample, you adjust the fixed cost allowance reasonably . Usually, you combine the new data with the previous claims to create an updated average. If it turns out that certain costs are no longer incurred, delete that item; if new structural costs arise, add them.

Always note why you adjust the fee. This explanation makes it immediately clear to the inspector that you determined the amount deliberately and with proper justification — precisely what ensures a smooth audit.

Common mistakes with fixed expense allowances

• Substantiate afterwards. The specification must be ready before the first allocation, not only when the inspector requests it.
• Overbudgeting. A generous allowance without substantiation is an easy target for auditors and is quickly classified as wages.
• Double reimbursement. Some costs may not be reimbursed tax-free concurrently; pay attention, for example, to the combination of a home office allowance and a travel allowance on the same day.
• Never revised. Compensation that remains unchanged for years while the work changes loses its substantiation.

Frequently asked questions about fixed expense allowances

Is a fixed expense allowance tax-free?

That is possible, but only if the reimbursement falls within a targeted exemption or intermediary costs and you substantiate the amount in advance with an investigation into the actual costs. Without substantiation, the reimbursement falls within the WKR's tax-free allowance or is considered taxable wages.

How do I substantiate a fixed expense allowance?

By first having actual costs claimed for a period, calculating averages from these, and breaking down the amount by cost item. Document this before awarding the fixed allowance for the first time and repeat the study periodically via a sample.

How long should the investigation into the actual costs take?

The law does not specify a fixed term. In practice, a period of approximately three months is often used, during which employees retain their receipts. More important than the exact duration is that the period is representative of the costs typically incurred.

What happens if my fixed expense allowance is too high?

The Tax and Customs Administration may classify the excess amount as wages, on which payroll tax is due. If current substantiation is lacking, the entire reimbursement may be charged against your tax-free allowance and, if this is exceeded, lead to a final levy.

How often do I need to review a fixed expense allowance?

There is no legally fixed interval, but in practice, it is advisable to conduct a sample check and make any necessary adjustments at least once a year. In any case, revise the reimbursement as soon as circumstances change, so that you keep the substantiation up to date and can immediately demonstrate during an audit that the reimbursement is correct.

Do employees have to keep their receipts?

Not for regular monthly records, but for periodic sample checks, yes. Agree in your regulations that employees temporarily keep their receipts upon request, so that you can verify and adjust the reimbursement.

Properly arrange fixed expense reimbursement with MKB Juristen

A fixed expense allowance saves you a lot of administrative work, but it stands or falls with a strong file built in advance. In addition to the Tax Authorities, you also want to make clear agreements with your staff regarding what the allowance covers. You do this with a well-drafted set of regulations and clear terms of employment.

MKB Juristen assists you with drafting regulations, incorporating them into your employment contract , and making your agreements legally watertight. Do you have a broader employment law issue? Then view our expertise in employment law. Do you want to get it right immediately? Schedule a no-obligation intake and we will discuss how to make a fixed cost allowance tax-safe and practically applicable.