Mark McLaughlin looks at clearance applications to HMRC and some practical issues for taxpayers and their advisers.
The UK tax system is complicated in many respects. The tax legislation is long, and can be difficult to interpret. However, this complexity and potential uncertainty is recognised in some respects, as the tax legislation also provides for taxpayers (or their advisers) to make applications to HM Revenue and Customs (HMRC) for clearances on the tax treatment of certain transactions (i.e. statutory clearances).
In addition, HMRC provides a ‘non-statutory clearances’ service in relation to areas of tax where the legislation does not otherwise provide for it.
In either case, a clearance is broadly written confirmation of HMRC's view of the application of tax law to a specific transaction or event, which the taxpayer can rely on in most circumstances. This article focuses on clearance applications for direct tax purposes.
Taxpayers generally want to know the tax treatment of a transaction or event in advance. Applications for most statutory clearances or approvals can be made to HMRC before the relevant transaction or event has taken place.
For example, the most common statutory clearance applications encountered in the author’s tax practice include the ‘transactions in securities’ income tax anti-avoidance provisions (ITA 2007, s 701), 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)).
None of the above statutory clearances are mandatory (i.e. there is no obligation to submit such clearance applications to HMRC). However, in practice most taxpayers or advisers will apply to HMRC for advance clearance where a transaction or event is potentially subject to tax legislation in respect of which a statutory clearance is available.
Useful information from HMRC on making statutory clearance applications is available on the Gov.uk website, including a list of statutory clearances or approvals and the HMRC contact details for making them (here
As indicated, in addition to clearances provided for by law, HMRC offers a non-statutory clearance facility in certain circumstances.
Before using this clearance service, HMRC requires the taxpayer (or agent) to have checked the various clearance and approval routes (see the website link above), in case there is a more appropriate procedure (e.g. a statutory clearance facility), and to have fully considered HMRC’s guidance (here
) in searching for the answer to their tax issue (or to have contacted the relevant HMRC helpline, if applicable).
HMRC will only provide written advice if it considers that there are genuine points of uncertainty about the tax treatment of the transaction, and the applicant has not been able to find the information needed. HMRC’s non-statutory clearance service guidance (here
) indicates that it is also necessary for the applicant to be uncertain about HMRC's interpretation of recently passed tax legislation. However, in the author’s experience this requirement for the relevant legislation to have been ‘recently passed’ is seldom applied by HMRC.
HMRC will refuse to consider non-statutory clearance applications in certain circumstances. For example (and unsurprisingly), HMRC will not entertain clearance applications for tax planning advice, or ‘approve’ any tax planning; nor will HMRC’s view be forthcoming on transactions considered to be for tax avoidance purposes. In addition, the non-statutory clearance service is not available if there are no genuine points of uncertainty; or if HMRC is checking the taxpayer’s tax position for the period in question; or if any related return for that period is final.
In addition, HMRC will not generally deal with advance clearance applications on certain tax issues, including the following:
- The ‘settlements’ income tax anti-avoidance rules (in ITTOIA 2005, pt 5, Ch 5);
- Trust deeds or settlements (i.e. executing non-charitable ones);
- The general anti-abuse rule (GAAR), i.e. whether the GAAR does, or does not, apply (nb taxpayers should consider whether the GAAR provisions need to be taken into account when completing their tax returns; however, for the purposes of this article it is assumed that they are not in point);
- Salary sacrifice arrangements (although HMRC may advise on the tax and National Insurance contributions consequences post-transaction; see NBCG4200);
HMRC offers some guidance on the information to be included in clearance applications.
For example, HMRC’s Statement of Practice 2/82 contains the suggested format of advance clearance applications on a company purchase of own shares. Furthermore, HMRC’s Help Sheet (‘Company Purchase of Own Shares’) contains checklists of information to be provided in clearance applications for a purchase benefiting a company’s trade, as well as a purchase in connection with an inheritance tax liability (here
For non-statutory clearance applications, HMRC helpfully provides the following checklists giving details of the information to be provided, and details of where to send the application (unless the applicant has a customer relationship manager, in which case the application should be sent directly to them), depending on the type of clearance sought:
- General - For all clearance applications other than those listed below) (‘Annex A’) (here).
- Business investment relief advance assurance - For non-domiciled persons taxed on the remittance basis (i.e. whether a proposed investment can be treated as a ‘qualifying investment’ within ITA 2007, s 809VC) (‘Annex B’) (here).
- Business property relief – For inheritance tax business property relief clearances (i.e. where there is an immediate inheritance tax charge) (‘Annex C’) (here).
- VAT – For clearance on the VAT treatment of transactions (‘Annex D’) (here).
Detailed guidance from HMRC on non-statutory clearances can be found in the ‘Non-Statutory Business Clearance Guidance’ manual (here
) in relation to applications by businesses, and in the ‘Other Non-Statutory Clearance Guidance’ manual (here
) for applications by HMRC’s non-business ‘customers’.
There are various practical issues when considering the submission of clearance applications to HMRC, some of which are outlined below.
1. Can a clearance really be relied on?
A clearance application or advice given by HMRC can generally be relied on, although there are certain exceptions to this general rule, such as if proposed transactions are not carried out exactly as described (see here
). Of course, the information provided in the clearance application must be complete, accurate and correct to the best of the applicant’s knowledge and belief.
Clearance applications should be drafted very carefully. Practitioners should note the principle established in R v Inland Revenue Commissioners, ex p. MFK Underwriting Agencies Ltd ( STC 873) that the taxpayer “…should have put all his cards face upwards on the table”. It goes without saying that if an application is materially incomplete or incorrect, any clearance or ruling given by HMRC on the basis of that application cannot be relied on.
In addition, HMRC guidance indicates that if a clearance is given that is incorrect in law, HMRC may consider itself under a duty to collect the correct amount of tax as required by statute, and there will be some circumstances where HMRC will not be bound by the advice given (NBCG7800).
2. Not very appealing!
There is generally no right of appeal against HMRC’s view on a clearance, unless a statutory right of appeal exists (e.g. appealable decisions under VATA 1994, s 83(1)).
However, if an HMRC officer has made a mistake (e.g. by failing to take a material fact into account), it may be possible for the taxpayer or adviser to ask for the clearance application to be re-examined, or otherwise to contact HMRC’s complaints manager (NBCG7100).
3. ‘Stuck’ with HMRC’s answer
Tax practitioners seem to have differing attitudes and approaches to clearance applications. Some practitioners consider it best practice to apply for clearance, and will routinely do so. Others prefer to ‘take their chances’ on the tax treatment of transactions.
There is understood to be a school of thought among some advisers that clearance applications actually put the taxpayer at a potential disadvantage. This appears to be on the footing that as there is generally no right of appeal against clearance rulings, if HMRC provides an unfavourable ruling, the taxpayer is largely ‘stuck’ with it. Indeed, I have heard it said that clearance applications should not be submitted unless the adviser knows that the answer is likely to be a favourable one!
In the author’s experience, most taxpayers prefer the comfort of knowing the tax treatment of proposed transactions in advance, for better or worse. In addition, there may sometimes be more than one way to undertake a transaction. The author has seen instances of HMRC refusing clearance for proposed transactions on one basis, but accepting that a similar outcome can be achieved in a different way (albeit at a higher overall tax cost).
4. Agree to disagree?
As mentioned, a clearance is broadly written confirmation of HMRC's view of the application of tax law to a specific transaction or event. However, what if the taxpayer or adviser takes a different view?
In the event of any disagreement with HMRC’s ruling (and subject to any statutory right of appeal, or possibly judicial review), consideration might be given to disregarding HMRC’s view, and self-assessing the transaction with full disclosure, including an explanation of what has been done, and clearly stating what the taxpayer considers to be the correct tax treatment (but see 5 below). This will allow HMRC the opportunity to open an enquiry into the relevant transaction, which is more likely to happen due to HMRC’s ruling not having been accepted by the taxpayer.
The risk of interest and penalties if the taxpayer’s view is incorrect should not be overlooked if this approach is adopted.
5. Wait and see?
Certain anti-avoidance legislation (e.g. the ‘transactions in securities’ provisions in ITA 2007, Pt 13, Ch 1) requires HMRC to determine that those provisions apply in their view. In other words, it is not necessary in such cases for the taxpayer to ‘self-assess’ that the anti-avoidance rules apply to their particular circumstances.
Some taxpayers and advisers therefore prefer to adopt a ‘wait and see’ approach, i.e. not submitting an advance clearance application, but waiting to see whether HMRC seeks to invoke the relevant anti-avoidance rule.
However, for various reasons (e.g. the lack of certainty resulting from not submitting an advance clearance application, and the prospect of interest charges on any additional tax becoming payable) most taxpayers and advisers tend to seek advance clearance from HMRC.
If an advance clearance application is submitted to HMRC, it may be necessary to keep the clearance ‘fresh’ (i.e. up-to-date).
For example, if a proposed transaction is delayed and does not take place within the timescale envisaged in the application, and/or there is any modification of any transaction, best practice will generally be to notify HMRC, and (where clearance has been given) to request confirmation that there is no change in HMRC's view.