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Prior to completing a company reorganisation or restructure, you can generally apply to HMRC for an advance statutory clearance, which serves the purpose of a written confirmation of HMRC’s view of the application of tax law to a specific transaction. This used to be a relatively straightforward process. However, the appointment of a new clearance team in 2019 resulted in a change in HMRC’s stance towards clearance applications.
One of the conditions for a statutory clearance application to be granted in respect of a company reorganisation or restructure is that the transaction must have a bona fide commercial purpose. Over the last couple of years, the new clearance team had been misinterpreting the ‘bona fide commercial purpose’ test, hence resulting in a number of cases going to Tribunal.
HMRC’s misinterpretation of the commercial purpose test seemed to be as a result of its misunderstanding of the High Court decision in Snell  STC 1279. Until very recently, in cases involving insertion of a holding company for the purpose of cash / asset protection, HMRC’s view was that clearance would not be granted for such a transaction, on the basis that that excess cash could just be protected by distributing it to shareholders.
The decision in Snell was that, as long as there is a commercial reason for the transaction, such as protecting the company’s surplus cash, the transaction should qualify for relief, as long as it is not for tax avoidance purposes. HMRC’s interpretation of the Snell casewas that that the commercial reason had to comprise the exact mechanism used to achieve the commercial objective, despite the High Court decision said the opposite!
Due to HMRC refusing clearances for such straightforward transactions, this has led to a number of referrals to the First-tier Tribunal which ended up going in favour of the taxpayer.
It is also good news that over the last few months, HMRC has been engaging with the Chartered Institute of Taxation and other professional bodies, and has started to grant clearances for transactions involving insertion of new holding companies, so it is evident that they are taking into account the recent Tribunal decisions.
Having said that, we are still seeing clearances for the insertion of personal investment companies being scrutinised by HMRC. HMRC’s view is that personal investment companies are used as entities to allow the relevant shareholders to extract profits tax-free and to invest them as they wish, which in their opinion does not serve a commercial purpose.
If you have had instances where a clearance application for your client has been rejected in relation to transactions involving setting up of personal investment companies, on the basis that referrals to Tribunal in respect of such transactions are generally successful, it would be worthwhile referring the case to Tribunal.
Another aspect to consider is that HMRC must respond to a clearance application within the statutory time limit of 30 days. However, an issue which a significant number of advisers have recently had to face is that although the clearance may be eventually granted, each round of correspondence with HMRC usually takes at least a month. We have assisted with a number of clearance cases, whereby HMRC had raised queries (usually on day 30), hence ‘buying’ them an extra 30 days to review the clearance application.
Obtaining clearance approvals can be a complex process, and given the recent technical issues, it is important that you seek professional tax advice.
At ETC Tax, we have several years of specialist expertise in HMRC clearances and would be happy to have a discussion with regards to a current or prospective clearance application in respect of your client. Visit out contact page to get in touch.
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