Using the non-statutory clearance facility
Pete Miller of The Miller Partnership explains how to use the non-statutory clearance facility for your clients’ proposed transactions. He goes into detail about when you can get clearance, when a clearance is binding, how to apply and questions of fact.
Readers will be aware that certain transactions can be subject to an advance clearance from HMRC in order to obtain a degree of certainty as to their tax treatment. In a previous article (see the June 2014 issue of TAXline), I focused on statutory clearances (ie, situations where the clearance facility is provided by legislation).
In this article, I will be discussing the perhaps less well-known facility for obtaining pre-transaction clearance even where there is no statutory clearance facility. This is frequently known as the non-statutory clearance facility.
When can you get the clearance?
The original policy behind this facility was to allow businesses to obtain greater certainty as to the tax consequences of transactions they were entering into, before those transactions were undertaken. The intention was to cover all taxes. Generally speaking, the taxpayers or, more usually, their advisers, will carry out the analyses and identify areas of uncertainty, and HMRC will respond to the questions asked. From this, a number of important issues arise:
- It is generally assumed that there has to be a genuine intention of carrying out a transaction, albeit subject to fully understanding the tax consequences, as most people will not bother to apply for a clearance otherwise. That said, nothing in the guidance specifically requires this. Indeed, the old Code of Practice 10, which is a predecessor to the non-statutory clearance facility, specifically permitted questions on the interpretation of legislation passed in the last four Finance Acts. While this is not referred to in the current guidance, practical experience is that HMRC will respond to such queries, too, even when the scenarios are hypothetical.
- There must be genuine uncertainty as to the tax treatment, which can extend to any of the taxes that might apply in a transaction. The concept of genuine uncertainty is fluid, but the general idea is that taxpayers will have reviewed HMRC’s manuals and other guidance and approached an appropriate HMRC helpline, if there is one. It follows that HMRC will not respond to applications where they consider that the published guidance already answers the question.
- It is imperative to make sure that the right questions are posed, as HMRC will only answer what it is asked for. This may sound trite, but having, myself, been the recipient of clearance applications under one of the statutory clearance facilities many years ago, I can vouch for the fact that it is fairly common for advisers to ask entirely the wrong questions or focus on entirely the wrong parts of the transaction in terms of the tax consequences!
Disclosing all the facts
Another vital element of non-statutory clearances, as with statutory clearances, is that your question must disclose all material information. I have a rule of thumb here: if there is a fact I do not want to mention in the clearance application, I ask myself why? If I do not wish to include it because it seems completely irrelevant, that’s fine. But if I do not wish to include it because it’s a slightly awkward fact that doesn’t comply with the commercial or technical story I am telling, then it seems highly likely that it actually is a material fact that might have an impact on HMRC’s views – so that fact should be fully disclosed.
Any clearance from HMRC that is based on it not holding all the appropriate information is clearly not worth the paper it is written on (and potentially such an approach contravenes the Professional Conduct in Relation to Taxation, as well).
When is a clearance binding?
A response from HMRC is not necessarily binding on a taxpayer. If HMRC disagrees with your analysis but you believe strongly enough that your analysis is correct, then your clients are entitled to carry out the transactions and to submit a return according to your analysis. Obviously, you will want to make your client aware of the risks of so doing and, in particular, the likelihood of a challenge by HMRC and the possibility of having to take a case not just through a technical enquiry but through the tribunals and court system.
Conversely, a clearance by HMRC will be binding on the department, subject to a number of caveats. The obvious areas where a clearance from HMRC will not be binding include:
- If the law changes then any ruling based on old law clearly cannot stand. It is therefore imperative that you make sure that legislation has not changed before carrying out a transaction.
- If the understanding of the law changes, perhaps through a decision by the courts, the same applies (ie, a clearance based on a previous understanding cannot stand). However, HMRC’s guidance caveats this slightly by accepting that, if the transaction has been carried out, it will consider whether the original clearance should be taken into account.
- If the transaction changes in a way that is material to the analyses, clearly any previous clearance cannot stand.
- As noted above, if the clearance is based on incomplete information and material facts have not been disclosed, again, the clearance cannot remain valid.
Interestingly, HMRC accepts that there are circumstances where it will accept that it is bound by a decision it has previously given, even if that was incorrect at the time. You have to be able to demonstrate that you relied on the advice from HMRC, that all material facts were disclosed and that the correct application of the law would lead to financial detriment. If that is the case, then HMRC will stand by advice that it has previously given. Where, however, the advice has an ongoing effect, such as whether a particular stream of income is chargeable to income tax year on year, once the correct analysis has been determined, future treatment must comply with the law.
The most important point that HMRC makes in its guidance is that it generally does not have discretion as to whether to apply the legislation correctly. Therefore, however inconvenient it may be, HMRC can only grant clearances or confirm tax treatments that comply with its view of the legislation.
How to apply
What, practically, must you therefore do in order to obtain a non-statutory clearance? The first part of the answer is to go to the relevant part of the government website and read HMRC’s guidance at Find out about the Non-Statutory Clearance Service. This sets out where and how to send your application and what information you must provide.
Most crucially, it is important that you have also read HMRC’s technical guidance on the relevant issues, contacted a helpline if there is one, and are still unable to determine HMRC’s view as to how a transaction should be treated for tax purposes. The website provides some useful checklists to ensure that you have reviewed the correct materials before drafting a clearance letter. HMRC will not advise if you have not reviewed the online material, contacted the appropriate helpline, or if there is no genuine uncertainty. You should explain in your letter what steps you have already taken and why you are still unsure of the correct analysis for tax.
It is also probably no surprise that HMRC will not comment where it thinks you are asking for advice on tax planning or structured avoidance schemes, where the transactions themselves appear to have a tax avoidance motive, or where the relevant return is already under enquiry. Equally obvious, but worth highlighting, is that HMRC will not advise if the return for the period in question is final (although it’s hard to imagine a scenario where you might be asking a question in such a case) or where there is a statutory clearance application available.
Finally, there are some specific exclusions, in respect of the settlements legislation, the tax consequences of executing non-charitable trust deeds, and venture capital schemes.
Questions of fact
More importantly, HMRC will not give clearances on questions of fact, such as whether certain activities amount to a trade or to a business. This has been a matter of some misinterpretation in the past. For example, I have seen cases where HMRC has apparently responded to a non-statutory clearance facility relating to either entrepreneurs’ relief or the substantial shareholding exemption, stating its agreement that the activities of a company or of a group amount to trading activities. I have always been concerned about these clearances, simply because they are strictly outside the scope of the non-statutory facility, so it is difficult to be certain whether they can be relied upon.
The question of whether activities amount to a business is something that has been of specific significance recently. As readers will know, the owners of residential property that is being rented out now suffer a restriction in terms of how much income tax relief they can have for interest payments. This means that there is some pressure for these property portfolios to be incorporated into a company using the incorporation relief at s162, Taxation of Chargeable Gains Act 1992 (TCGA 1992). For this relief to be available, the investment activities have to amount to a business.
In the past, HMRC appears to have been willing to respond to clearance applications by confirming that it considers activities to amount to a business for this purpose. There has, therefore, been some consternation that HMRC no longer gives such clearances. The point I would make is that the non-statutory facility was never intended to allow HMRC to give such confirmations, so the perceived recent change of approach should be seen more as HMRC robustly applying its own rules, and not as HMRC having changed its view. Indeed, in the minutes of a recent liaison meeting with HMRC it was acknowledged that “some clearances in relation to s162 may previously have been given in error”.
A question of timing
The other issue to be aware of is that of timing. Statutory clearance facilities generally have a prescribed timescale within which HMRC must give a substantive response or ask questions which are likely to have a material bearing on its final response. There is no such time limit within the non-statutory facility, although HMRC says that it will try to respond within 28 days.
Unfortunately, my experience – and that of a number of other advisers – is that the more complex the case, the longer it takes HMRC to respond. My current record is something around 105 days. The difficulty with this, of course, is that the more difficult cases are the ones where the consequences of getting a tax analysis wrong, or of having an argument with HMRC, are likely to be much greater, and yet to get any kind of clearance introduces a delay of three or more months into the process. It is easy to see why advisers who routinely deal with more complex cases are not necessarily fans of the non-statutory facility.
About the author
Pete Miller is the founder and principal of The Miller Partnership, a corporate tax advisory firm specialising in company transactions. He is an ex-Inland Revenue clearance officer and was also involved in drafting the guidance for the non-statutory clearance facility when it was first set up.