Revenue Clearances - 'One Stop Shopping'

RAY McCANN of the Inland Revenue explains the new streamlined arrangements for Revenue clearances.

SINCE THE PUBLICATION of the Review of Links with Business late last year, the Revenue has been working to improve the way in which it handles applications for clearance under some of the main statutory clearance provisions. To date, this has involved the clearance provisions relating to demergers, purchase of own shares and section 707, Taxes Act 1988. Those of you who have asked for clearance this year should already have noticed some of these changes including:

• The use of a single application where clearance is required under two or more of these provisions with one reply covering all of the clearances asked for, a 'One Stop Shop' approach.
• A substantial improvement in response time for the majority of applications with day of receipt risk-assessment and fast track processes for no tax risk applications.

Whilst the Revenue has also been working to include the capital gains clearances in respect of share exchanges and company reconstructions, due to the large number of capital gains clearance applications it receives (around 4,500 annually) it was not possible to include them within the 'One Stop Shop' approach from the start. Having successfully integrated the other main clearances, the Revenue is, however, now able to do so and this article explains the revised arrangements that apply from 1 November 2002.

The capital gains clearances have been the responsibility of the clearance section based in Solihull. From 1 November 2002 this work will move to the Business Tax Clearance Team based in 22 Kingsway, London (full contact details are shown below.)

Also from that date capital gains clearances will be dealt with under 'One Stop Shop' arrangements so that a request for clearance under the capital gains tax rules can be combined with any of the other clearances mentioned above. Only one single application is required and you do not need to provide an additional copy. The Revenue will send one reply in response to the clearances asked for.

Any applications sent to Solihull before that date and not yet finalised will be completed by the London Team, so replies to ongoing requests for information and any re-application following changes to a particular transaction should be sent to the London address. The capital gains clearance team in Solihull will not handle any new clearance applications after 31 October 2002.

Intangible fixed assets

The Finance Act 2002 introduced a new statutory clearance in paragraph 88 of Schedule 29. This clearance is very closely related to the capital gains clearance provisions, so the Revenue has decided to bring intangible assets clearance within the 'One Stop Shop' approach immediately. Where such a clearance is required, it should also be sent to the Business Tax Clearance Team. As with the capital gains clearances, paragraph 88 of Schedule 29 applications can be combined with a clearance request under the other provisions in one joint application.

Helping us to help you

One of the Revenue's main priorities is to ensure that it responds to a request for clearance in the shortest possible time. For most of the clearances dealt with it is not usually necessary for every piece of information to be read and it will save us all time and money if the application contains all the relevant details and is laid out clearly. Revenue staff spend a lot of time asking for basic information that could have been included within the application.

As part of improvement work, a group of individuals from outside of the Revenue is looking at what information should be included within an application and the guidance available. The results of this should be published soon but, in the meantime, here are some quick pointers as to how you can help speed up a clearance application:

1. Send the application to the correct address (see below). The Revenue still receives applications sent to offices it left years ago. If in doubt, the Revenue website (www.inlandrevenue.gov.uk/cap) has up-to-date information.

2. Please list clearly, at the start of your letter, all the clearances you need - section 707, section 138, section 215 and so on.

3. There are Statements of Practice for purchase of own shares (SP2/1982) and demergers (SP13/1980). These will help you plan the layout of your application. The suggested layout will be good for the other clearances also.

4. List the transactions you intend to carry out separately from any narrative explanation as to the background and the commercial reasons for carrying them out (if possible list the transactions on a schedule).

5. Unless the application is very urgent, do not fax it.

6. If you do fax or e-mail your application, do not also send a hard copy.

7. Do not telephone to get confirmation that the application has been received unless you have not had any reply within ten working days, or the application is particularly urgent (within that time you should normally have received an acknowledgement or clearance).

8. If, after you have asked for clearance, there is a change to the proposed transactions, say so right away.

9. If the transaction has changed, do not send a completely new application; instead simply outline the change.

10. Only ask for a clearance that the Revenue can give. Rulings or opinions on other issues, such as whether taper relief applies or the enterprise investment scheme rules are satisfied and so on, cannot be given.

11. Take care how the application is worded; for example, section 219, Taxes Act 1988 provides that the proceeds of a share buy back will not be a distribution, not that 'the proceeds will be tax free', 'exempt', 'free of tax' and so on. (This is to ensure that you understand exactly what clearance is being given.)

12. Where loan notes are being issued, give details of the terms of the loan notes (including redemption arrangements).

13. Where shares are being issued, say whether they are redeemable.

14. For purchase of own shares, demergers and the capital gains clearances, ensure that the statutory conditions are satisfied, as the Revenue has no discretion to ignore them (there is advice on some of the more common pitfalls below).

What the Revenue does with your application

The Revenue applies a risk-assessment approach to all applications and assesses them according to three main categories: no tax risk, some tax risk and higher tax risk. This latter category is applied where the transactions are particularly complex or where there is a need to carry out more detailed research to evaluate the level of risk than can be done at this initial stage. In most cases, the Revenue will have carried out the risk-assessment within twenty-four hours of receiving your application.

After this risk-assessment stage, the applications that present no tax risk are cleared by a fast track process. This means that for many applications the clearance is issued within a few days of receipt. Obviously holiday periods and so on will impact on this but, in general, it is common for clearance to be given within three or four days of receipt. No separate acknowledgement is issued for 'no risk' cases.

Those applications that are assessed as containing some risk (around 25 per cent of the total) are considered in detail and this may involve asking for further information or a discussion of the application with the relevant local district or office. In many cases, the application is reclassified as no risk at this stage and the requested clearance is issued. The higher risk cases follow much the same process. However, a senior Inspector is responsible for agreeing the final decision.

Who decides whether to refuse clearance?

The decision to refuse clearance is not taken lightly. Usually a minimum of two Inspectors will be involved in the decision and the Head of the Clearance Team reviews all applications where the reviewing Inspector considers that the application should be refused. In some cases an Assistant Director may be involved in the decision. Apart from some purchase of own shares and demerger applications where the factual tests are not met, further information is sought before a decision is taken to refuse an application. Increasingly, enquiries are focussed on the particular concerns that the Revenue has, so in many cases it will be clear that some aspects of the transaction are causing difficulties.

Common pitfalls

Demergers

• The distributing company must be the holding company of a trading group or a trading company before and after the demerger and the demerged company must carry on a trade after the demerger.
• You should clearly state that all of the companies that are party to the demerger are resident in the United Kingdom and that no redeemable shares are to be issued.
• If a post-demerger sale is contemplated, please give full details.

Section 707 clearances

• 'Working Together' issue 6 has useful advice (it is available through the Inland Revenue and The Chartered Institute of Taxation websites).
• Please explain fully the commercial reasons and why the transaction is not being carried out for tax reasons. A simple assurance that the transaction is bona fide commercial is not enough. This is particularly important where cash, loan notes or redeemable shares feature as part of the transaction.
• Where one company is acquiring another, please show clearly what interest the vendor shareholders have both before and after the transaction in the purchasing company.
• Where the transaction amounts to the formation of a group of companies, you should explain the use of cash, loan notes or redeemable shares (many section 707 refusals involve such transactions).

Capital gains clearances

• As mentioned above, where the transaction includes the issue of loan notes, please include details of the loan notes being issued.
• The capital gains clearances require an issue of shares or debentures. If no shares or debentures are being issued, then no clearance can be given.

Purchase of own shares

• If any other payments are being made to the vendor, for example as compensation for loss of office, please give a clear statement that the payment is entirely separate from the share purchase.
• The purchase must be for the benefit of the trade; please explain what trade benefit is expected to be obtained from the purchase.
• Section 219 also contains a number of factual tests that must be met if clearance is to be given. Many section 219 applications are refused each year because these factual tests have not been satisfied. The most common are the 'ownership test' and the 'connected persons test'.

The ownership test

The vendor must have owned the shares for five years at the date of sale to the company. This is reduced to three years where the estate of a deceased shareholder or a beneficiary of such an estate sells the shares. If this test is not met, a clearance cannot be given under section 219(1)(a), Taxes Act 1988.

The connected person test

The rule for section 219 is not the same as the usual connected person rules. In general, a person is connected with a company if he holds 30 per cent or more of the share capital, voting power or loan capital. In many cases where the entire shareholding is sold, this is not a problem. However, where, for example, spouses are involved, then each spouse is regarded as holding the other spouse's shares for the purpose of the connected person test.

This simple example illustrates the point:

Mr & Mrs A between them own all of the issued shares of A Ltd. Mrs A owns 40 per cent and agrees to sell all of her shares to Co A Ltd. As Mrs A is regarded as owning her husband's shares, no clearance can be given. Mrs A is connected to the company by virtue of her husband's shareholding.

Where do I send my application?

For clearance applications under:

• section 215 (demergers), section 225 (purchase of own shares) and section 707, Taxes Act 1988
• section 138, section 139(5), section 140B and section 140D, Taxation of Chargeable Gains Act 1992 (capital gains)
• paragraph 88 to the Finance Act 2002 (intangible fixed assets)

send your application to: Mohini Sawhney, 5th Floor, 22 Kingsway, London WC2B 6NR.

If the application contains information that could affect the share price of a company quoted on a stock exchange, the application should be sent to Ray McCann at the same address.

Faxed applications

Fax applications to 020 7438 4409. Remember, if you fax, you do not need to send a hard copy.

If you intend to fax stock market sensitive information, please telephone Ray McCann before you send it. Ray McCann's telephone number is 020 7438 6585. If he is not available, then contact Eric Gardner on 020 7438 6547.

E-mail applications

From 1 November 2002, e-mail applications may be sent for all of the pilot exercise clearances. The e-mail address is reconstructions@gtweb.gov.uk. Please clearly state if you require an e-mail reply.

Categories: