UK tax legislation is often complex and not always easy to interpret, and taxpayers typically want to know the tax considerations of a transaction in advance. To assist with this uncertainty, taxpayers can apply for clearance from HMRC on the tax treatment of certain transactions before the relevant transaction or event takes place.
What is a Clearance?
Clearances are broadly defined as written confirmation of HMRC's view of the application of tax law to a specific transaction or event, where the taxpayer can rely on this verification in most circumstances. Our previous
blog discusses where HMRC will not give clearance.
Clearance applications to HMRC can come under:
- ‘Statutory clearances’ – the tax treatment of certain transactions that are defined under legislation. This article will focus on statutory clearances.
- ‘Non-statutory clearances’ – transactions in relation to areas of tax where there is an uncertainty as to how the legislation will apply to the transaction.
However, issues with reliance on the clearance can arise where the taxpayers has not carried out the proposed transaction in accordance with that described in the clearance application.
The information and disclosure provided in the clearance application should be accurate and finalised to the best of the taxpayer’s understanding, otherwise the clearance might risk being void. Taxpayer's should therefore put their 'cards on the table' when it comes to making these disclosures to HMRC and obtaining clearance.
Statutory Clearances
Some of the most common statutory clearance applications encountered are:
- The ‘transactions in securities’ anti-avoidance provisions (ITA 2007, s 701 and CTA 2010, s.748);
- Exchange of securities for those in another company (TCGA 1992, S.135);
- Scheme of re-construction involving issue of securities (TCGA 1992, S.136);
- Company demergers (CTA 2010, s 1091);
- Company purchases of own shares (CTA 2010, s 1044); and
- Company reconstructions for capital gains purposes (TCGA 1992, ss 138, 139(5)).
An important point to note is that there is no obligation to file a clearance application for these statutory clearances. However, advance clearance should be applied for by taxpayers or advisers where a transaction is potentially subject to tax legislation in respect of which a statutory clearance is available.
Helpful guidance from HMRC on making statutory clearance applications is available on the following
HMRC website, including a list of the statutory clearances and the HMRC contact details for submitting clearances.
What Information Should be Included?
HMRC recently shared a
statutory clearance checklist with the Chartered Institute of Taxation, which offers the necessary information for HMRC to consider a clearance application.
Within this checklist, HMRC have detailed the information that needs to be include in statutory clearance applications, which includes:
- Relevant information of all the shareholders, with details of the classes of shares each hold before and after the transactions;
- Details of the full rights of all classes of share or other instruments;
- A step-by-step representation of the transactions to be carried out and supporting diagrams showing the current and final positions;
- Relevant documents should be enclosed, (e.g. most recent accounts, valuation of the shares); and
- Provide details of both the value and form of consideration to be given to every shareholder involved in the transactions at each step (e.g. ordinary shares, preference shares, redeemable shares, loan notes, cash, assets, etc.).
Approach from HMRC
It is generally advisable to engage a professional tax advisor to draft a robust clearance application.
In many cases, HMRC have rejected clearance applications on the basis that the reasons for the transaction was for the shareholders’ benefit and not for the commercial purpose of the business. The fundamental aspect to therefore consider when constructing a clearance application, is that HMRC want to understand the reasons for the transaction and why it is considered to be carried out for bona fide commercial reasons.
Therefore, specialist tax advice should be sought when putting together a clearance application. If you have any queries around any of the topics discussed in this article and would like assistance with clearances, please do not hesitate to
get in contact with a
member of the team for expert tax advice.
Related Articles
https://www.stratostax.co.uk/insights/its-a-fact-hmrc-restricts-its-clearance-procedures/
https://www.stratostax.co.uk/insights/in-the-clear-hmrc-clearance-applications/
