There certainly used to be (and may still be - it's been a long time since I looked at it) a distinction in the rules around personal taxation of employment allowances vs expenses. If I recall correctly, where employees were reimbursed for specific expenses they'd incurred this wasn't taxable (nor could a deduction then be claimed for the expenses), but if they just received a general allowance without reference to whether they'd actually incurred the costs, that was treated differently (it was taxable as employment earnings, I think).

Edited to add: Yes, round sum allowances are still taxable as part of employment income http://www.hmrc.gov.uk/manuals/eimanual/EIM05100.htm, so HMRC at least will treat it as employment income even if it's not part of the basic salary. I assume your sister may also do so because if she was to look for a new job, she'd want to make a similar amount in total?