A “clearance” from HMRC is essentially an agreement as to the tax consequences of a particular transaction. There are two basic types:
“Statutory Clearances”, where the tax legislation itself provides a mechanism for disclosing a proposed transaction in advance to HMRC, in order to obtain their agreement that it is not caught by specific anti-avoidance legislation. The commonest example tends to be what is now Section 701 of the Income Tax Act 2007.
This is a powerful piece of anti-avoidance legislation that enables HMRC to serve a “counteraction notice” after a transaction has taken place, in order to charge income tax on what would otherwise be a capital sum (taxable at 18% instead of 40%) or even a sum not liable to tax at all.
Anyone contemplating a transaction that could be caught by this legislation can apply in advance for a “clearance” from HMRC to reassure them that their transaction will not be treated in this way. Section 701 is only one example of a number of “statutory” clearances provided for in the legislation.
“Non-Statutory Clearances”, where although the legislation does not require HMRC to do so, they have been prepared to give their opinion on the tax consequences of a transaction. It is in this area that the big changes have taken place.
Code of Practice 10
“COP 10” was the leaflet which governed these non-statutory clearances, and it still does govern those for personal tax as distinct from business tax. COP 10 had a number of limitations, and in particular, it only offered advance advice in the following situations:
The interpretation of legislation in the last four Finance Acts – any earlier legislation was not covered
Double Taxation Agreements with other countries
Whether someone is employed or self-employed
Whether an Extra Statutory Concession or a Statement of Practice would apply to a particular situation
Matters of “major public interest”
In any other situation, all that was available were “post-transaction rulings” – in other words, go ahead and do it, and then we’ll tell you if we’ve got you or not!
There has been a major overhaul of HMRC’s procedures over the last couple of years, and one of the best things to come out of it has been the recently announced extension of non-statutory clearances to the whole of the business sector. Initially, the scheme was trialled for the larger companies dealt with by HMRC’s Large Business Service, but from 1stApril it is available to any business that wants certainty as to the way a proposed transaction will be taxed.
There are certain conditions to be fulfilled if a ruling is sought, and the most important is the “cards face up on the table” principle. There is no point in getting a clearance on the basis of misleading or incomplete information, as HMRC will not be bound by it.
If, on the other hand, you genuinely disclose the full nature of the proposed transaction, HMRC will consider themselves bound by the answer they give you, even if they have made a mistake and told you something is not taxable when it should be.
These clearances are dealt with by a specialised team in Southend on Sea, and HMRC’s website includes detailed instructions on how to apply for them – see the “What’s New” section for 1 April 2008).
This extension of the non-statutory clearance procedures is to be welcomed, as is the fact that it will be operated by specialists. Any Tax Adviser will tell you how frustrating the old COP 10 procedure could be, when you had to wait while a local official dithered nervously as to how to respond to a request for a non-statutory clearance. Let us hope the procedure is soon extended to personal tax as well as business tax.