The do’s and don’t of advance tax clearances

In the context of corporate transactions – company sales, reorganisations, demergers and reconstruction, and purchases of own shares – shareholders and the companies concerned may wish to ensure that anti-avoidance legislation does not trigger unexpected tax liabilities. Advance tax clearance allows a company to contact HMRC setting out details of a proposed corporate transaction and requesting written confirmation that they will not invoke particular tax anti-avoidance legislation.

In this article Sheldon Cole, Tax Partner, discusses some of the advance tax clearances that may be applied for to mitigate the risk of unwanted tax charges arising.

What advance clearances are available?

The key advance tax clearances include:

• Applying for clearance that the exchange of shares or loan notes in a target company, for an issue of shares or loan notes in the acquiring company, will not be regarded as a disposal of the target company shares for capital gains tax (CGT) purposes (Section 138 TCGA 1992)
• Applying for clearance that share sale consideration received by individual shareholders will not be subject to income tax as a deemed dividend at rates of up to 39.35%, as opposed to CGT rates of 10% and 20% (Section 701 Income Tax Act 2007)
• Applying for clearance where a shareholder sells shares back to a company that the consideration will be an “exempt distribution” in the hands of the shareholder. This will benefit from CGT at rates of 10% and 20%, as opposed to income tax (Section 1044 Corporation Tax Act 2010)

Is applying for advance tax clearance required?

Applying for clearance is not mandatory but is usually advisable. Generally, individual shareholders want to understand the likely tax treatment of the different forms of share sale consideration they will receive e.g. cash, shares, loan notes. Companies undertaking demergers or reconstructions will also want to ensure that they can benefit from the corporation tax reliefs available.

What does applying for advance tax clearance involve?

Applying for advance tax clearance involves setting out all the material facts of a proposed corporate transaction in a letter to HMRC’s Clearance Unit. Details of the shareholders and the companies involved are included. Supporting documents include the accounts of the companies involved, their Articles of Association and any shareholders’ agreements in force.

The letter would set out the commercial reasons for the proposed transaction and request confirmation from HMRC that they accept the proposed transactions are not being undertaken for tax avoidance purposes or to secure a tax advantage. HMRC have 30 days from the receipt of the application to grant or refuse clearance or request additional information.

When should you apply for advance clearance?

Clearance should be applied for when the transaction structure is settled e.g. when Heads of Terms have been signed. Applying too early risks that the transaction structure may change, which would necessitate sending a follow-up letter to HMRC. Applying too late risks that a response may not be obtained from HMRC in advance of completion of the transaction.

What happens if the transaction structure changes?

If there is sufficient time, a follow up letter should be emailed to HMRC’s Clearance Unit providing details of the changes to the transaction structure and asking HMRC to re-confirm that any clearances they have granted remain valid.

Occasionally, in the context of corporate transactions, there is simply not sufficient time to obtain advance tax clearance and the parties involved may simply decide to proceed without it, accepting the tax risks involved.

What does an advance clearance from HMRC not cover?

Obtaining advance tax clearance only confirms that they will not invoke the relevant CGT or income tax anti-avoidance legislation. The proposed transactions still need to be implemented in accordance with the clearances obtained. If not, HMRC could regard any clearances granted as void, so the support of an experienced corporate lawyer is vital.

Advance tax clearance does not mean that shareholders are guaranteed CGT Business Asset Disposal Relief and the 10% CGT rate on gains arising from sale. Nor does obtaining clearance mean that any share valuations included are agreed by HMRC.

For more information, please contact Sheldon Cole on 01934 620428 or email him at sheldon.cole@westcotts.uk.