David Tipping examines the circumstances in which a taxpayer or adviser can obtain a clearance from HMRC in advance of entering into a transaction.
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A client may want to know in advance whether HMRC is going to challenge a particular transaction. Sometimes this can be achieved by obtaining a clearance from HMRC, which allows a client to know its view of the law ahead of time.
However, such clearances are only obtainable in certain circumstances. This article firstly discusses some of the most common circumstances when a taxpayer can obtain a clearance from HMRC. It then outlines the non-statutory clearance process that applies when there is no clearance provision provided for in the legislation.
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Statutory clearances
There are a number of provisions which provide for clearances. Some of the most common applications are identified below. Although each clearance is subject to its own legislative rules, these provisions have a number of shared features.
The taxpayer must make the application in writing to HMRC. HMRC has 30 days in which to respond. Within that period, HMRC must either notify the applicant of the outcome, or issue a notice requiring further information. The applicant then has 30 days to provide that information or else the application will not proceed.
It is essential that the application contains all relevant information – failure to fully and accurately disclose all the facts generally renders any clearance void.
Most applications are dealt with in HMRC by the Clearance and Counteraction Team. Where multiple clearances are sought in relation to the same transaction, it is advisable to make a single application so that they can be dealt with together.
Share-for-share exchanges
Capital gains tax (CGT) relief for share-for-share exchanges is disapplied (under TCGA 1992, s 137) if the person to whom the shares are issued holds at least 5% of any class of shares in the company being acquired, unless the exchange:
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is effected for bona fide commercial reasons; and
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does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to CGT or corporation tax.
Either the acquiring company or the company being acquired may make an application to HMRC under TCGA 1992, s 138 for clearance that these two conditions are met.
It is important to note that the clearance relates only to whether TCGA 1992, s 137 is engaged – the statutory clearance does not extend to whether the relief is positively available.
Share-for-share exchanges also benefit from relief from stamp duty (under FA 1986, s 77). This relief is not subject to its own clearance regime. However, it is a condition of the relief that the transaction is effected for bona fide commercial reasons and does not have a main purpose of avoiding tax. Given the similarity between this condition and the conditions in TCGA 1992, s 137, a clearance obtained under TCGA 1992, s 138 will ordinarily suffice to show that this condition is also satisfied. However, strictly, the clearance under TCGA 1992, s 138 does not have statutory force for the purposes of FA 1986, s 77, nor does the clearance have to consider the avoidance of stamp duty, stamp duty reserve tax or income tax. The TCGA 1992, s 138 clearance is therefore marginally narrower than the condition in FA 1986, s 77.
Transactions in securities
The transactions in securities (TIS) legislation (ITA 2007, Pt 13, Ch 1 and CTA 2010, Pt 15) provides for a more comprehensive clearance regime. Under ITA 2007, s 701 or CTA 2010, s 748, a person can apply to HMRC for a clearance that HMRC will not issue a counteraction notice under the TIS legislation.
HMRC does not give reasons if it grants a clearance, but will give reasons when the clearance is refused. A positive clearance prevents HMRC from issuing a counteraction notice in relation to the transactions included in the application. It is therefore important that the application is comprehensive and includes all potential transactions in securities.
Purchase of own shares
There is a provision (CTA 2010, s 1044) for a company to seek a clearance from HMRC that the company’s purchase of its own shares will not be treated as a distribution. The legislation provides that HMRC’s decision has legal consequences irrespective of the outcome.
If HMRC issues a notice that the conditions of CTA 2010, s 1033 are met, the payment will not be treated as a distribution. Conversely, if HMRC issues a notice that the conditions of CTA 2010, s 1033 are not satisfied, then the payment will be treated as a distribution.
Demergers
There are three separate circumstances (under CTA 2010, ss 1091 and 1092) when a company may seek a clearance from HMRC in relation to a demerger:
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When the company intends to make a distribution, it can seek a clearance that it is an exempt distribution.
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When the company intends to make a payment which might be chargeable, it can seek a clearance that the payment will be made for genuine commercial reasons, and will not form part of a scheme or arrangement, the main purpose or one of the main purposes of which is the avoidance of tax.
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When the company either becomes connected with another company or ceases to be connected with another company, it may apply for a clearance that any future payments it makes will not be chargeable only by reason of the company becoming or ceasing to be connected with the other.
If HMRC notifies the company that the relevant conditions are satisfied, the effect of the notice is that the distribution will be exempt, or the payment will not be chargeable.
If HMRC fails to comply with the 30-day time limit, the company may instead require the First-tier Tribunal (FTT) to determine the application. Unusually, the company may also make an application to the FTT where the application has been unsuccessful, effectively enabling a right of appeal against HMRC’s refusal to grant clearance.
2. Non-statutory clearances
Where no statutory clearance mechanism is available, a taxpayer can still seek HMRC’s view in relation to areas of legal uncertainty through a non-statutory clearance.
HMRC will only provide advice under the non-statutory clearance mechanism where it considers that there is a genuine uncertainty in the existing law. HMRC expects that a taxpayer will have first reviewed any published guidance before making an application and may refuse to provide a clearance where it does not agree that the law is uncertain.
Limits of non-statutory clearances
There are several circumstances in which HMRC will refuse to grant a non-statutory clearance. HMRC will not provide clearances in relation to questions of fact (e.g., whether activities amount to trading) and will similarly refuse to grant a clearance which is in substance asking HMRC to give tax planning advice.
HMRC also refuses to grant non-statutory clearances in relation to certain subject matters, such as the general anti-abuse rule (FA 2013, Pt 5) and the settlements legislation (ITA 2007, Pt 5, Ch 5)
Appealing a non-statutory clearance
Given the possible scope of non-statutory clearances, it is possible that the outcome of the application is an appealable decision.
For example, if an HMRC officer determines, as part of a non-statutory clearance, that a product is subject to the standard rate of VAT, that decision is potentially appealable (under VATA 1994, s 83(1)(b)).
Any appealable decision should include a paragraph explaining the taxpayer’s rights to appeal.
Effect of a non-statutory clearance
Because non-statutory clearances do not have any basis in the legislation, they are not strictly binding on HMRC.
However, where the taxpayer has “put all his cards face upwards on the table” (to use the words of Bingham LJ in R v Inland Revenue Commissioners, ex parte MFK Underwriting Agents Ltd [1990] 1 WLR 1545), it may be possible to establish a legitimate expectation that HMRC will abide by the non-statutory clearance.
Ordinarily, a legitimate expectation must be enforced through a judicial review in the High Court, rather than by way of an appeal to the tribunals.
Practical point
Although seeking a clearance can be useful to resolve points of technical difficulty ahead of important transactions for clients, before any application is made, it is important to discuss the advantages and disadvantages of seeking a clearance. While a positive result will undoubtedly provide reassurance, an application may also put undue attention on the transaction in question and increase the likelihood of an HMRC challenge if it goes ahead, regardless. The key takeaway for advisers is that any application for a clearance must make full disclosure of the material facts and circumstances. Anything less than complete transparency with HMRC risks rendering the clearance worthless and could lead to costly litigation in the future.
