HMRC is there to impose a tax charge whenever it can. The clearance system will help defend a tax payer against claims from HMRC that the transaction was set up to avoid tax. There are many HMRC clearances available for different set of circumstances. Our specialist team of tax solicitors review your position and apply for the appropriate HMRC tax clearance for you.
We are always happy to discuss your situation and provide a scope and fee estimate. Please do give us a call.
Using HMRC effectively
It is easy to get lost in the maze of dealing with HMRC. To help build an awareness of the practice and procedures of HMRC we have explained below:
Availability of tax clearances from HMRC
We have secured a great many tax clearances from HMRC over the years. We have illustrated some of the more common applications for clearance but there are others we can obtain.
Trading status of companies for Business Assets Disposal Relief (entrepreneurs’ relief) purposes
In order to benefit for the 10% rate of capital gains tax upon sale of a company or partnership interest there are requirements to meet. One such requirement is that the majority of the business or partnership must be a UK trading company. There is a de-minims exception of 20%. We are presented with situations where the client is not sure if the company qualifies as a trading company. Typical causes for concern are where the company hold investments such as large cash balances or property or where there are trading operations abroad.
We analyse the historic trading position and the nature of assets held or source of income. If we believe there are reasonable prospects that HMRC may determine that the trade qualifies we will approach HMRC and supply the type of evidence we believe will be of assistance.
Tax neutrality on the re-organisation or de-merger of a business
When companies are being re-organised, re-structured or separated shares will be transferred but often no cash changes hands. Typical cases include where a business is to be separated into new companies. For example, if a company has a trade and investment properties it may wish to split out the trade from the properties and create two companies. Often the intention is to sell the trade separately to the properties in the future.
Lack of consideration is no barrier to a tax charge
The point is the lack of cash consideration paid out to shareholders under the re-organisation does not prevent tax charges from arising. There is anti-avoidance legislation HMRC can use which is designed to prevent abuse. If the shareholders are employees or directors HMRC will be looking for any way to assess the share transfer to income tax and national insurance. In other cases a charge to capital gains tax may be assessed by HMRC.
In many cases it is possible to re-organise and avoid immediate charges to income tax and or capital gains tax – i.e. make the re-organisation tax neutral. We do seek HMRC clearances to confirm the tax neutrality. Advance planning will improve your chances of success.
Confirmation of hold over relief from capital gains tax upon a share for share exchange
Typically upon imposition of a new holding company shareholders swap their shares for shares in a holding company so that a group structure can be established. Holding companies are popular for a variety of reasons. For example trading assets can be “ring fenced” in one company to protect against loss in the event of liquidation.
Technically a share swap is a disposal which could give rise to a charge to capital gains tax. However, we do secure clearances from HMRC that swapping shares will not create a tax charge.
Clearance that stamp duty is not payable
In certain cases a re-organisation, de-merger or spin off will not give rise to a charge to stamp duty. We review and if the conditions are met will make the application to HMRC.
Company buying back shares from a shareholder
It is possible for a company to use its reserves to buy back shares from shareholders and for the shareholders pay 10% capital gains tax. Normally reserves are used for dividends where the tax rate can be over 38%. However, a number of conditions need to be satisfied for the beneficial tax treatment to apply. Usually whether the conditions are satisfied is never clear cut which is why a HMRC clearance is helpful.
We review the situation and if we consider the conditions can be satisfied will put together a clearance application for HMRC. If approved the company share buy back can proceed and the shareholder has the comfort of knowing that capital gains tax will apply. The alternative is to report the buy back on the shareholder’s tax return but with that route there is no certainty for many years until the window for HMRC to open an enquiry has passed.
Transactions in securities (TIS rules)
HMRC will assess tax payers to income tax and often national insurance instead of the much lower rates of capital gains tax if they think the transaction is not genuine and designed to avoid tax. The transaction in securities rules apply most frequently to close companies. We have secured many assurances over the years to the effect that the transfer of shares will benefit from capital gains tax.
Advance assurance for SEIS or EIS
In order for a company to offer its investors the tax benefits that come with SEIS or EIS advance assurance from HMRC is needed. We have secured many advance assurances and can spot quickly areas where there may be a cause for concern.
Securing HMRC clearance
The taxpayer must provide accurate details of the circumstances and surrounding facts. HMRC will want to see documents such as the articles of association, share buy back agreement, de-merger agreements and supporting documentation in many cases. HMRC will also want to see the step list setting out the order of events. The timing of each step in a transaction can make or break the chances of obtaining the desired HMRC tax clearance.
Implications of not providing the correct information to HMRC
If relevant information is not provided, then the clearance is void. Judgement is required as to how much information is necessary.
If the step list for the transaction is not in the right order HMRC will refuse clearance and in some cases an unexpected tax liability arises.
Should you apply for HMRC clearance
If time permits and your transaction falls within the areas of tax for which a HMRC clearance is possible – yes applying for an HMRC clearance is always recommended. HMRC do not charge for this service.
The statutory tax rules under which the clearance is sought must be set out in the application. Not every transaction is is capable of HMRC clearance because there is no enabling legislation. In such cases you may need to apply for a ruling (discussed below).
Timing for obtaining the HMRC clearance
Timing for the HMRC response times needs to be factored into the transaction timetable. Generally speaking providing HMRC are given the relevant documentation in the format they know and understand the average turn around time for an HMRC clearance application is two weeks. Technical queries and rulings can take much longer for HMRC to deal with.
HMRC will deal with technical questions relating to interpretation of legislation. For example, if you were concerned as to whether your business qualified for EMI, EIS or SEIS we can approach HMRC for you and obtain a determination. Alternatively, if you were concerned about whether expenditure will qualify for R&D tax credit relief they do offer an assurance service for certain companies.
HMRC will not provide a clearance as such. What HMRC do give is a non-binding statutory ruling. The tax payer is left to hope he can rely upon that. Unsatisfactory but the best there is.