Taxpayers can apply to HMRC for advance tax clearance ahead of implementing a range of different transactions and topics. It can be seen as a 'belt and braces' approach for many transactions, and buyers always check for it, so why do so many advisers not insist on it?
Is it a matter of cost or is it just an attitude that if you follow 'the letter of the law' in a transaction, clearance is overkill?
Applying to HMRC for a tax clearance before implementing a transaction or series of transactions provides confirmation from HMRC that a taxpayer's expected tax treatment will apply, as intended, to the proposed transaction.
The obtaining of tax clearance provides welcome certainty for taxpayers who must always self assess Corporation Tax, Income Tax, Capital Gains Tax and Stamp Duties.
A valid clearance also potentially avoids an unwelcome tax enquiry once the transaction has been completed.
It can also serve as a cost-saving assurance for the buyer of a company who may otherwise have to undertake expensive due diligence or create tax warranties and indemnities to confirm that there are no unexpected tax consequences as a result of any earlier reorganisation, restructuring or other type of transaction, and protect themselves accordingly.
What is there not to like?
Tax clearance is only effective if it sets out accurately the background to the transaction, the motivation for undertaking it, and it lists the steps to be followed in the relevant transaction. Once granted, if the proposed transaction steps change, or there has been a lengthy delay between obtaining clearance and implementing the transaction steps, it may be necessary to go back to HMRC to ask for confirmation that they are happy that the clearance granted remains valid.
This means that advisers need to create a step plan and complete a tax analysis for each of the different steps to enable the clearance application to be written.
Creating a tax analysis of a step plan is a really useful thing to do, even if clearance is not applied for.
However, the mere act of applying for advanced tax clearance ahead of a transaction is also a really effective means of creating a set of checks and balances, to ensure that no relevant legal or tax issues have been overlooked, and of course, making a step plan for any transaction is a sensible idea in general.
Tax clearance will be voided if the transaction is not undertaken in the way that it is explained in the application. For this reason, it is often best to draft each clearance application according to intentions rather than using a template and trying to shoehorn a transaction into someone else’s step plan and clearance.
Types of clearance vary between:
- Statutory clearance: this is where the tax legislation provides that HMRC must provide a clearance facility for a particular transaction when asked.
- Non-statutory clearance: this is where HMRC offer a clearance service for a particular type of transaction but where they may decline to give an opinion if they do not consider that the position is sufficiently uncertain.
There are many different forms of tax clearance. For example, small and medium-sized companies and their owners typically rely on them to confirm:
- Capital treatment on a company Purchase of its own shares from a shareholder
- No gain/no loss treatment for CGT in respect of a Share for Share Exchange on creating a group, Demerging activities or when undertaking other types of company Reorganisation and Reconstruction.
- Capital treatment for other Transactions in Securities in other transactions, ranging from take-overs to management buyouts to the liquidation of a company.
- Stamp duty relief on reorganisations, although this is not in the form of an advance clearance, rather, it is a letter requesting adjudication from HMRC that relief applies, which is submitted after the relevant transaction has taken place (within 30 days)..
Executors and Personal representatives will often apply for a clearance certificate for Inheritance tax probate to show they have paid all the Inheritance Tax due.
Share schemes: you can also apply to HMRC in advance to confirm share valuations, for example in advance of setting up Enterprise Management Incentive (EMI) share option scheme.
In February 2024, HMRC announced that it would not provide tax clearance to give a binding answer on the following Termination Payment cases, outside the normal Non-Statutory Clearance process, for example, where there is a genuine point of uncertainty on the correct treatment.
- the disability and injury compensation exception
- the foreign service exception
- how the £30,000 threshold applies to payments made by the third party and by the employer
- non-cash provisions
If you or your advisor have a genuine point of uncertainty on the Tax and National Insurance treatment of a termination payment, you should use the Non-Statutory Clearance Service.
Why bother with clearance?
Tax clearance acts as insurance against future costs.
The problem in most cases is that you just do not know what the future holds.
As noted above, if you are selling a company that has undertaken the type of transaction that would involve a clearance, it is much easier for the buyer's due diligence if you can produce a valid clearance from HMRC.
A change of plans may require further changes to your business.
For example, you could find that you have completed one transaction for which you did not obtain tax clearance only to find that you later have to undertake some form of reorganisation. That then may require you to look back at the earlier transaction, and if you did receive clearance for that earlier transaction, then there should not be any problems. If you did not have clearance and no one has retained the step plan followed (if there was one), that makes for an interesting time for tax advisers who may be forced to try and work backwards to double-check for no adverse consequences.
This all comes at a cost.
Of course if you have not obtained a tax clearance when it is on offer, there may be suspicions on HMRC's side as well as by any future potential buyer of the business. If you are then subject to a tax enquiry, HMRC will ask why no clearance was requested and the lack of clearance may provide HMRC with the grounds needed to enquire in quite invasive terms via the issue of an Information Notice, which could lead to the making of a Discovery Assessment.
Useful guides on this topic
Purchase of Own Shares
How can a company repurchase its share capital? What are the Companies Act requirements? What are the tax consequences for the company and shareholders?
An Index to Share Transactions incl. Reorganisations, Demergers & Share ExchangesWhat tax relief applies in a share transaction? When do you need a company reorganisation or reconstruction? What tax reliefs apply to a company reorganisation, a share-for-share exchange, reconstruction or other transaction involving shares?
Demergers: What are your options?
What are the different types of demergers that are available when you want to reorganise your business? What are the situations where they are typically used?
Transactions in SecuritiesThe Transactions in Securities (TiS) rules are anti-avoidance rules. When triggered, a profit or gain becomes subject to Income Tax, denying any generally more favourable Capital Gains Tax (CGT) treatment.
Termination Payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?
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