HMRC statutory clearances - an overview

What purpose does a clearance serve?

A clearance does not give effect to any transaction, nor is there an obligation to use the facility ahead of a transaction. Instead, if the clearance application is granted this will either confirm for the taxpayer that a particular statutory relief is available or it will provide comfort that, in the described circumstances, the relevant anti-avoidance legislation will not bite. 

The GOV.UK website provides a full list of the statutory clearances that are available at https://www.gov.uk/guidance/seeking-clearance-or-approval-for-a-transaction, but the three most commonly applied for are:

• Transactions in Securities
• Share exchanges, and
• Company Purchase of Own Shares
  
  

General form of a clearance application

Regardless of the specific clearance sought, all applications contain common features.

The application letter should clearly state the tax provisions under which clearances are being sought and a single letter will suffice regardless of the number of clearances being applied for on a transaction. If the facts stated in the application change then the clearance provided will no longer be binding on HMRC. Consequently, if you are engaged in a transaction where other professionals are involved (for example lawyers drawing up contracts), it is important to share the application and the clearance with them so that the documentation matches the fact pattern described to HMRC. In practice, ahead of a transaction if there are minor tweaks to the proposed steps, then it will be possible to write to the clearance team describing the changes to the facts to request confirmation that this does not jeopardise the clearance. This does not require a fresh application. All applications should be sent to:

BAI Clearance
HMRC
BX9 1JL

The application can be sent by email to reconstructions@hmrc.gov.uk but should be accompanied by standard wording to the effect that the client recognises the security risks associated with the use of email.

Facts to be provided

You should always provide the names of the individuals and businesses involved and their tax references as well as the latest full accounts. Additionally the letter should contain the contact details of the adviser as well as an appropriate authority to act from the client. The information provided must include:

• The proposed date of the transaction,
• The parties involved,
• The steps to be carried out in the proposal,
• The intended consideration,
• Individual shareholdings as these are no longer readily obtainable from confirmation statements,
• Pictures! HMRC like to see diagrams especially when complex groups of companies are involved, 
• Any contingencies,
• The commercial reasons for the transaction,
• Any preparatory or connected transactions, and
• How the conditions relating to the statutory provision are met.
  
  

Features of specific applications

What is the specific purpose of each of the clearances listed above and what additional points should be noted in respect of each?

1. Transactions in Securities (TiS)

TiS is an anti-avoidance provision, giving HMRC the power to issue a 'counteraction notice' in respect of a transaction involving shares or securities where it is believed:

• It is carried out other than for bona fide commercial reasons, and
• Where the main object is to obtain a tax advantage.

The counteraction notice has the effect of reclassifying as a distribution a transaction that has been treated by the taxpayer as capital, the impact of which will be to levy tax at higher income tax rates rather than as a capital gain.

Provided the full facts are provided in the application, a clearance will be binding on HMRC meaning that no counteraction notice may be issued. Conversely, if clearance is denied, there is no right of appeal. Unusually, TiS clearances can be applied for either before or after a transaction has taken place.

2. Share exchanges

The clearance provides comfort that the disposal of shares or securities in one company for those in another will not be treated as a disposal for capital gains. Certain conditions need to be fulfilled and the transaction must be for bona fide commercial reasons where the main purpose in not for tax avoidance. 

The application must be made ahead of the relevant issue of shares or securities but can be made by the company whose shares/securities are being acquired or by the acquiring company. TiS clearance applications are normally made at the same time as part of a 'belt and braces' approach to risk.

Under statute HMRC has 30 days in which to respond to the application or to request further information but if clearance is denied or HMRC fails to respond within the 30 days there is a right of appeal to the Tribunal where any decision is final.

3. Company Purchase of Own Shares (CPoS)

The default position where a company buys back its own shares under the Companies Acts is for the purchase to be treated as a distribution. Where the distribution is made to an individual this will be subject to income tax. Subject to certain conditions being fulfilled, one of which being that the purchase must benefit the trade, the payment can be treated as capital and therefore subject to the lower capital gains tax rates and, if Business asset Disposal Relief is available, the tax rate can be as low as 10%.

The form of a CPoS clearance application is laid out in detail in an HMRC Statement of Practice, SP2/82. If HMRC refuse clearance there is no taxpayer right of appeal.

Following the buyback there is requirement to make a return to HMRC within 60 days providing details of the payment and the reasons it is believed the capital treatment can apply. So, even though an application is not required to effect the capital treatment if it's considered that the conditions are fulfilled, a similar level of information will be required for the return.

Conclusion

Corporate finance transactions can entail a material level of risk for all parties and the use of the Statutory Clearance facility can mitigate some of the tax risks involved ahead of the deal completion so it make sense to access that insurance. This overview summarises just some of the clearances available and the contents of the applications. If you have any questions or would like any more detailed advice, contact Mike Chapman on 0127 484913 or mike@knilljames.co.uk