HMRC clearances

HMRC now routinely grants clearance for transactions for inserting new holding companies, but it remains reluctant to do so for transactions inserting personal investment companies.

Many of you will know that I specialise in corporate reorganisations and reconstructions, so I regularly interact with HMRC’s clearance unit to obtain the appropriate clearances, and there have been some interesting developments to report.

Firstly, HMRC has now issued a checklist for applying for clearances. This has not yet been loaded on the government website but it has been published on the CIOT website .?

The checklist makes interesting reading. As someone who has been submitting clearance applications for well over 20 years, and for some period before that was an Inland Revenue inspector receiving clearance applications, much of it is simply common sense and includes information that I would have included in an application, as a matter of course. I might take issue with the relevance of one or two of the items on the list but, as a practical matter, it is always going to be easier for people to comply with the checklist, to reduce the hassle factor in getting clearances.?

I fervently hope, however, that HMRC also takes a common sense approach to the list and doesn’t dogmatically insist on every single piece of information listed, even in cases where it is clearly not relevant. For example, when applying for clearance for a transaction by a company that has corporate shareholders, the checklist requests ‘details of the shareholders of those companies and the association/connection details’. In cases where the corporate shareholder has no connection or association with the individual shareholders of the relevant company, I would hope that a simple statement to that effect would be sufficient and that HMRC would not insist on a list of shareholders of the corporate shareholder, even though it is irrelevant.

For readers who are less experienced with HMRC clearance applications, it might also be worth reviewing HMRC’s general guidance on applying for clearances, which can be found on the government website .

One major issue was what many of us saw as a failure by HMRC to understand the commercial drivers behind the insertion of a new holding company, usually to protect the assets or cash of a trading company. This appeared to arise through a misunderstanding by HMRC of the High Court decision in Snell [2007] STC 1279. HMRC’s view for some time was that clearance would not be granted for a share exchange for the protection of a company’s cash, on the basis that that cash could be just as easily protected by distributing it to shareholders! HMRC’s interpretation of Snell was that the commercial reason had to encompass the precise mechanism used to achieve the commercial aim, even though the High Court decision said quite the opposite. The decision was that, as long as there is a commercial reason for the transaction, such as protecting the company’s surplus cash, any mechanism will qualify for relief, so long as it doesn’t contravene the tax avoidance rules at TCGA 1992 s 137(1). The results of HMRC refusing clearance for such uncontroversial transactions has been a series of referrals to the First-tier Tribunal under TCGA 1992 s 138(4) and several written decisions from tribunal judges highlighting HMRC’s misunderstanding of Snell. HMRC now routinely grants clearance for transactions for inserting new holding companies, so it is clearly listening to the tribunal and has, I think, amended its internal policy, accordingly.

I still find difficulties in getting clearance for the insertion of personal investment companies, i.e. where individual shareholders replace their direct shareholding in a trading company with a consortium company. HMRC considers these structures to be ‘extractive’, in that it sees these personal investment companies as vehicles designed to allow the individual shareholders to extract their share of the profits tax-free and to invest them as they choose. HMRC’s view is that this is often (even usually) not a commercial purpose and clearances are rarely granted for these structures.

Interestingly, however, referrals to the tribunal under s138(4) are frequently successful, despite HMRC’s concerns. So, if your clients are trying to set up personal investment companies, it might be worth persevering with a referral to the tribunal if HMRC has refused clearance.