Simply put, a tax clearance from HMRC can provide certainty regarding the tax treatment of a proposed transaction.
Taxpayers are generally required to self assess their tax liabilities, with potential penalties and interest if they get things wrong. Obtaining a clearance provides confirmation that a taxpayer’s expected tax treatment will apply, and helps avoid a tax enquiry once a transaction has been completed.
If an application for a tax clearance is refused, then a taxpayer can reconsider their proposed transaction, and see whether they can achieve their desired outcome in a more tax efficient way.
When drafting a clearance application, it is usual to create a detailed step plan for the transaction with tax analysis, which is very useful and assists in refining the transaction.
When recording the transaction in a taxpayer’s return, the clearance can be referred to including the reference, avoiding the need for detailed disclosure.
Why might I need a tax clearance?
HMRC can provide both statutory and non-statutory clearances.
Typical statutory clearances are for:
HMRC also offer a non-statutory clearance service for taxpayers who need clarification on guidance or legislation relating to a specific transaction. Please note however that they will only give a non-statutory clearance where there are genuine points of uncertainty.
Are there any downsides?
There is a time and cost implication to applying for a clearance. HMRC is required to respond to a clearance application within 30 days, however that response could be to request further information. If so, once that information is provided then HMRC have a further 30 days to respond to the additional information. If a transaction needs to take place quickly then there may not be time to apply for clearance.
Writing a good clearance application takes time and therefore results in professional fees. It is important to provide all relevant information to HMRC to help them make a decision. A clearance application should accurately set out the background to the transaction, the steps to be taken and the reason for the transaction.
If a clearance application misses out relevant facts, or if the transaction does not take place as set out in the application, then the clearance will be voided.
If HMRC refuses to give clearance, but the transaction still goes ahead, then it has been flagged to HMRC and they may be more likely to raise an enquiry. However, it should be noted that refusal to give clearance does not mean that the desired tax outcome will not apply, merely that HMRC may challenge it.
Conclusion
If you are contemplating a significant transaction, for which a tax clearance may be relevant, then we recommend that you consider applying for tax clearance. Even if you decide that, in your specific circumstances, a clearance is not required, it will still be good to have thought about it.
In most cases, applying for clearance will provide welcome certainty for taxpayers and help to prevent future issues.