Reorganisations

Taxpayers can apply to HMRC for advanced tax clearance ahead of implementing a range of different transactions and topics. It can be seen as a 'belt and braces' approach for many transactions, and buyers always check for it, so why do so many advisers not insist on it?

Is it a matter of cost or is it just an attitude that if you follow 'the letter of the law' in a transaction, clearance is overkill?

Applying to HMRC for a tax clearance provides confirmation from HMRC that a taxpayer's expected tax treatment will apply, as intended to the subject matter of the transaction.

The obtaining of tax clearance provides welcome certainty for taxpayers who must always self assess Corporation Tax, Income Tax, Stamp Duties etc.

A valid clearance also potentially avoids an unwelcome tax enquiry once the transaction has been completed.

It can also serve as a cost-saving assurance for a company buyer who may otherwise have to undertake expensive due diligence or create tax warranties to confirm that are no unexpected tax consequences as a result of an earlier reorganisation or other type of transaction.

What is there not to like?

Tax clearance is only effective if it sets out accurately the material background to the transactions, the motivation of undertaking it and it lists steps to be followed in the relevant transaction.

This means that advisers need to create a step plan and complete a tax analysis for the different steps.

Creating a tax analysis of a step plan is a really useful thing to do, even if clearance is not applied for.

However, the mere act of applying for advanced tax clearance ahead of a transaction is also a really effective means of creating a set of checks and balances and of course, making a step plan for any transaction is a sensible idea.

Tax clearance will be voided if the transaction is not undertaken in the way that is explained in the application. For this reason, it's best to draft each clearance according to intentions rather than using a template and trying to shoehorn a transaction into someone else’s step plan and clearance.

Types of clearance vary between:

• Statutory clearance: this is where the tax legislation provides that HMRC must provide a clearance facility for a particular transaction when asked.
• Non-statutory clearance: this is where HMRC offer a clearance service for a particular type of transaction.

There are many different forms of tax clearance. For example, small and medium sized companies and their owners typically rely on them to confirm:

• Capital treatment on a company Purchase of its own shares from a shareholder
• No gain/no loss treatment for CGT in respect of a Share for Share Exchange on creating a group, Demerging activities or when undertaking other types of company Reorganisation and Reconstruction.
• Capital treatment for other Transactions in Securities in other transactions ranging from take-overs to management buyouts to the liquidation of a company.
• Stamp duty relief on reorganisation.

Executors and Personal representatives will often apply for a clearance certificate for Inheritance tax probate to show they have paid all the Inheritance Tax due.

Share schemes: you can also apply to HMRC in advance to confirm valuations, for example in advance of setting up Enterprise Management Incentive (EMI) share option scheme.

In February 2024 HMRC announced that it is not going to provide tax clearance to provide give a binding answer on the following Termination Payment cases, outside the normal Non-Statutory Clearance process, for example, where there is a genuine point of uncertainty on the correct treatment.

• the disability and injury compensation exception
• the foreign service exception
• how the £30,000 threshold applies to payments made by the third party and by the employer
• non-cash provisions

If you or your advisor have a genuine point of uncertainty on the Tax and National Insurance treatment of a termination payment, you should use the Non-Statutory Clearance Service. 

Why bother with clearance?

Tax clearance acts as insurance against future costs. 

The problem in most cases is that you just don't know what the future holds.

As noted earlier if you are selling a company that has undertaken the type of transaction that would involve a clearance, it is so much easier for the buyer's due diligence if you can produce a valid clearance from HMRC.

A change of plans may require further changes to your business. 

For example, you could find that you have completed one transaction for which you did not obtain tax clearance only to find that you then have to undertake some form of reorganisation. That then may require a look-back at the earlier transaction, if you have received clearance for that earlier transaction, all good, you do not have too much of a drama. If you did not have clearance and no one has retained the step plan followed (if there was one), that makes for an interesting time for tax advisers who may be forced to try and work backwards to double-check for no adverse consequences.

This all comes at a cost.

Of course if you have not obtained a tax clearance when it is on offer, there may be suspicions on HMRC's side. If a tax enquiry follows HMRC will ask why no clearance was requested and also the lack of clearance may provide HMRC with the fuel it needs to enquiry in quite invasive terms via the issue of an Information Notice, which could lead to the making of a Discovery Assessment. 

Useful guides on this topic

Purchase of Own Shares
How can a company repurchase its share capital? What are the Companies Act requirements? What are the tax consequences for the company and shareholders?

An Index to Share Transactions incl. Reorganisations, Demergers & Share Exchanges
What tax relief applies in a share transaction? When do you need a company reorganisation or reconstruction? What tax reliefs apply to a company reorganisation, a share for share exchange, reconstruction or other transaction involving shares?
You can reorganise or separate company activities and different subsidiaries using a variety of different methods. The super-practical tax guides in this index provide an outline of the tax treatment together with step by step guides, case studies and tax clearance templates.

Demergers: What are you options?
What are the different types of demergers that are available when you want to reorganise your business? What are the situations where they are typically used? 

Transactions in Securities
The Transactions in Securities (TiS) rules are anti-avoidance rules. When triggered, a profit or gain becomes subject to Income Tax, denying any generally more favourable Capital Gains Tax (CGT) treatment.

Termination Payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

What is a company reorganisation or reconstruction? What tax reliefs apply to a company reorganisation, a share for share exchange or a reconstruction?

Capital Gains Tax: legislation covering the share for share exchange rules. For new rules for offshore companies see s138ZA.

• Share-for-share exchange is a Capital Gains Tax (CGT) relief.
• Where a shareholder exchanges their shares for shares in another company and is able to claim Share for share relief, the share exchange is not counted as a disposal for CGT purposes.
• See CGT section: Share for Share Exchanges

What are the steps for creating a group by way of a share for share exchange? What reliefs and exemptions apply?