Helpsheets ... continued 39 from homepage

Entitlement to the full state pension depends on having sufficient qualifying years. Where a person reaches state pension age on or after 6 April 2016, they need 35 qualifying years for a full state pension. If they have less than 35 qualifying years but at least 10, they will receive a reduced state pension.

A qualifying year is secured either through the payment of Class 1, Class 2, Class 3 or Class 4 National Insurance contributions or the award of National Insurance credits. National Insurance credits are awarded in various situations, such as where a person claims child benefit.

From 1978 to 2010, a scheme known as Home Responsibilities Protection (HRP) operated to reduce the number of qualifying years that a person with caring responsibilities needed in order to qualify for the full state pension. HRP was replaced by National Insurance credits from 2010.

Following a review by the Department for Work and Pensions, historical issues came to light with the recording of HRP on entitled individuals’ National Insurance records.

From May 2000 it became mandatory for claimants to provide their National Insurance number when claiming child benefit. Where a claim for child benefit was first made before May 2000 and the claimant did not provide their National Insurance number when making the claim, the HRP to which they were entitled may not have been recorded on their National Insurance record. This may mean that they receive less state pension than they are entitled to receive.

Last autumn, HMRC started sending letters to people who they believed may have been affected by this issue. However, anyone who has not received a letter but thinks that, potentially, they may have missing years is urged to check their eligibility online, and claim any years that are missing. This can be done by visiting the Gov.uk website at www.gov.uk/home-responsibilities-protection-hrp.

Where missing years are claimed and the claimant is not otherwise eligible for the full state pension, reinstatement of the missing years will increase their state pension. If the claimant has already reached state pension age, any arrears due to them as a result of the missing years will be paid. However, it should be noted that, as the state pension is taxable, this may mean that there is some tax to pay on the arrears.

HMRC's Alternative Dispute Resolution (ADR) process was introduced over a decade ago, the intention being to provide an 'alternative' cost-effective method for dealing with disputes between taxpayers and HMRC. ADR is a free service, although taxpayers can involve a professionally accredited mediator from outside HMRC at their own cost.

The ADR process

The process allows for the involvement of a trained ‘facilitator’, who works with both parties to resolve the dispute. The idea is that in a stalemate situation an independent facilitator  acts as a neutral third-party mediator.

As has long been the case, the 'independent' mediator is an HMRC officer who has been specifically trained, from a different team within HMRC having had no prior involvement with the case. Mediation meetings default to either video or telephone, therefore any taxpayer who wishes to conduct a meeting in person will need to make representations to the mediator early in the process.

An application for a case to be considered is made online and may be made at any time, although it is more appropriate to apply once all the facts of a case have been established and an impasse has been reached between the two parties. Either HMRC or the customer can suggest the use of ADR. The dispute is then referred to the mediator who will decide whether the case is suitable for ADR within 30 days.

What types of dispute can be raised?

HMRC does not offer ADR in specific instances such as debt recovery or automatic late payment penalties, high income child benefit charges, tax credits, PAYE coding notices, disagreements regarding a point of law or cases where HMRC criminal investigators are involved. HMRC will not usually allow mediation in disputes on the same issue as one that it is intending or has taken before the Tribunal.

If the dispute cannot be resolved through mediation, then the formal internal review process, or an appeal to the Tribunal, may be used instead.

Benefits of ADR

The primary benefit is the reduction in cost for both parties. It also allows both parties to step back, reassess the situation and, with the help of a trained facilitator, attempt to resolve the issue without the added stress and cost of going to a Tribunal.

Another significant advantage is the time it saves. By using ADR, the back-and-forth of letters between the taxpayer and HMRC is eliminated, and a clear timetable for the process is established. The expectation is that a case accepted for ADR will be settled, or at least be out of the ADR process, within four months, making the process more efficient and productive for both parties. To meet this expectation, both the taxpayer and HMRC must commit to providing information requested by the mediator within 15 days. Where HMRC needs to obtain approval for any settlement agreed at the mediation, this must be done within a week of the meeting.

A ‘dedicated helpline’ is available to provide support and guidance throughout the ADR process. This helpline is intended to speed up the service and to be an introduction to the process. Taxpayers who may be considering applying for ADR but are unsure whether their specific case fits the criteria, can speak to a qualified member of the ADR team and be advised accordingly. The ‘dedicated helpline’ is not intended to answer questions relating to a specific case but to advise whether the procedure is suitable for the caller's particular problem.

Practical point

The relatively low uptake of ADR tells a story. HMRC's Annual Report and Accounts 2023- 2024 show 1,309 applications made to ADR during the tax year – a 29% increase on the previous year; of those, only 512 applications were accepted, and 83% of those resolved. Either taxpayers are unaware of the service or if they are, they do not think the case will result in their favour so do not bother.

Many start-up businesses take out loans to get going, e.g. to purchase stock needed to sell, or to make the first rent payment or rent deposit. Whether that business is set up as unincorporated or as a company will impact on when interest paid before trading is allowable for tax purposes.

Unincorporated business

The most straightforward situation is where the business is set up as a sole trader or partnership. In this situation, any interest incurred pre-trading but paid personally will be treated for tax purposes as if incurred on the first day of trading.

Companies

Two situations present themselves here: firstly, of an individual who borrows in their own name and lends to the company and secondly, where the company takes out the loan in its own name.

Individual finances the company

An individual borrowing to lend to or acquire shares in a close company will generally be able to claim tax relief against income tax paid provided that the borrower (and associates) controls more than 5% of the company's ordinary share capital or the borrower works in the company's management team and holds some part of the company's share capital, however small.

Note: a 'close company' is one that is under the control of five or fewer participators (or any number of participators if those participators are directors), or where more than half the company's assets would be distributed to five or fewer participators, or to participators who are directors, should the company close.

Company borrowing

The position is different where the company takes out the loan as tax relief for interest incurred is subject to special rules known as the 'loan relationship rules'.

These rules apply to income and expenses relating to 'money debts', e.g. interest paid or received. Until the company starts to trade, any 'money debt' will be treated as a non-trading debit under the loan relationship rules.  Where there are insufficient profits to offset in the accounting period, such debits are carried forward and offset against total profits in subsequent periods.

Election

The way to ensure tax relief is obtained is to make an election to HMRC to treat the interest and other relevant costs as a trading expense once the company starts to trade. As ever with any tax claim there are conditions:

the election must be made within two years of the end of the accounting period in which the non-trading debit arises; and

the company must begin to trade within seven years of that period; and

the non-trading debit amount would have been treated as a trading debit had it been incurred in the period since trading commenced.

Second 'trap'

HMRC’s guidance states that the interest, etc must be incurred in an accounting period to be allowable. The 'trap' is that an accounting period only starts when a company has a source of income.

Practical point

The answer is to open an interest-bearing bank account as soon as the company is incorporated and deposit a small amount (say, £10) which triggers the start of an accounting period. The election can then be submitted to HMRC immediately but definitely before the end of two years following the end of the accounting period in which the debit arises, or the election will be refused.

VAT-registered businesses who use invoice accounting generally account for VAT when invoices are issued and received. HMRC have recently published new Guidelines for Compliance which set out their recommended approach to the compliance process to ensure that VAT is accurately declared by the business. The guidelines can be used to help establish an appropriate tax control framework which identifies and assesses tax risk and has effective controls in place to reduce those risks. The guidelines cover specific areas and also outline good practice in relation to risk management.

Order to cash

The overall objective of order to cash is the timely, complete and accurate recording of transactions and payments. This will cover the placing of the sales order, the dispatch of the goods and the issue of the tax invoice. The guidelines highlight controls which should exist at each stage, including, for example, controls to ensure that sales orders are only processed within customer credit limits, Goods Dispatch Note shipments are accurately and promptly recorded and that the correct tax rates are used on tax invoices.

Procure to pay

The procure-to-pay section of the guidelines covers initiation of purchase orders, the receipt of the supply, the receipt and processing of the supplier’s tax invoice and the payment of that invoice. The guidelines set out the controls that should exist at each stage, such as ensuring that purchase orders are only placed for approved requisitions, that supplies are only accepted if they have a valid purchase order, that only invoices that represent goods or services received are posted to accounts payable and that payments are only made in respect of invoices relating to goods and services which have been received.

Employee expenses

The guidelines also outline expected controls in relation to the processes for capturing, authorising and paying employee expenses, highlighting system controls and those relating to the processing of expenses and workflow. They also include examples of controls for different types of expenses, such as motor expenses, business entertainment and mobile phones.

Record to report

Record to report refers to the accounting process which involves the collection, processing and presentation of information to provide strategic, financial and operational analysis. For example, data gathered in the general ledger will be used to produce balance sheets, profit and loss statements, cash flow statements, budget reports and management reports. Controls are needed in relation to both the overall systems implementation and the operation of the general ledger.

VAT reporting

For invoice VAT accounting, controls are needed for various purposes, including compliance with Making Tax Digital (MTD) regulations and the provision of VAT reports. This would include, for example, controls to ensure that VAT reporting is MTD-compliant.

Manual adjustments

Manual adjustments may be made for various reasons, for example to consolidate totals from different business functions or systems or to correct errors. The guidelines set out controls which are expected for different types of manual adjustment.

Outsourcing

Controls are also needed where third parties are used to perform parts of the process. The guidelines highlight the controls which are required where functions are outsourced.

Recommended reading

The Guidelines for Compliance (Help with VAT compliance controls (GfC8)) are recommended reading for businesses using invoice accounting for VAT. The business should check that the recommended controls are in place.

Post pandemic, homeworking has become the norm, especially the increase in 'hybrid' working, i.e. spending part of the week at home and part in the office.

On the face of it, claims for tax relief on travel and subsistence costs for such employees should be straightforward, as in no claim, because if the employee were not working from home, they would bear the cost of ordinary commuting to the office or workplace.

However, that does not consider s337-339 ITEPA 2003which confirms that a deduction from earnings is allowed for travel and subsistence expenses where an employee is obliged to incur the cost should the workplace be temporary (i.e. not a 'permanent workplace'). The question with homeworking is whether the home becomes the 'permanent' workplace and the office 'temporary’.

Definition of 'temporary workplace'

A 'temporary' workplace is somewhere where the employee attends to perform a task of limited duration or for a temporary purpose. Therefore, even if attendance is regular, the place may not be classified as a 'permanent' workplace. The next section of the s339 ITEPA 2003) defines a 'permanent' workplace as being where an employee spends or is likely to spend more than 40% of their working time over more than 24 months. This rule is not just about the amount of time spent but also looks at the intention or expectation of the parties at the time the period was initially agreed and at any time subsequently.

Under this rule, travel from home to a place of work where the employee spends less than 40% of their time (e.g. two days out of five) should mean that the office is a 'temporary' workplace and therefore travel from home to the office (and any subsistence costs incurred) should be tax deductible.

HMRC appears to confirm this in their Employment Manual at EIM32065 where the text states that a temporary workplace is 'somewhere the employee goes only to perform a task of limited duration or for a temporary purpose'.  The text goes on at EIM 32150 to state that 'where a visit is self-contained (that is, arranged for a particular reason rather than as part of a series of visits to the same workplace for the continuation of a particular task) it is likely to be for a temporary purpose'. The thought arises that should the attendance at the office be for a particular purpose (e.g. a sales meeting), then that may reinforce the point that the office is 'temporary' and that a claim may be possible.

HMRC's stance

From the above it could be argued that a claim for travel from the home base to the office could be made. Pre pandemic, HMRC's main investigations under this heading covered situations where employees had a workplace at home and employers met the cost of journeys between home and the office. Post pandemic, we can expect to see such situations being queried in the future, especially if the employer makes any reimbursement of costs incurred.

HMRC is aware of the increasing likelihood of claims (not least because many of HMRC's employees still work at least some of their working time at home), so it has updated its guidance under EIM01471 headed 'Employment income: employees who work at home: arrangement of guidance' which confirms situations where tax relief may be claimed on expenses or benefits incurred whilst homeworking and provided by the employer. HMRC gives an example where a claim would be disallowed under EIM32174 'Travel expenses: travel for necessary attendance: employees who work at home: hybrid working example'. The example considers the scenario where a 'flexible way of working is offered on a voluntary basis' – this leads to the question as to whether the claim would be allowed should flexible working from home be compulsory.

Practical point

HMRC's stance is that most employers provide all the facilities necessary for work to be carried out on business premises and therefore any employee working from home does so out of choice. Therefore, no tax relief for travel or subsistence costs whether paid personally or by the employer is available.