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Share for Share exchange tax clearance

HMRC changing stance on S138 CGTA 1992/S701 ITA 2007 clearance applications

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Has anyone noticed a different stance from HMRC regarding share for share exchanges over recent months?

I have prepared several over the years, stating that for commercial reasons single Ltd co would like a holdco to transfer surplus assets to protect from general trading risks, this has never been questioned, they have refused one and asked similar queries on another (awaiting reply).

A sample of their replies are below:

- How will this benefit the sub?

- Provide a detailed list of the assets being transferred

- what activities will holdco undertake other than holding shares in sub

- Are there any impediments to shareholders in sub taking a dividend and reinvesting in their own corporate as they see fit

- Protection of assets is not a commercial reason

Even after answering the above on one case, they have refused the application. 

Replies (36)

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blue sheep
By NH
11th Aug 2020 06:18

That does surprise me, I always thought these were pretty much a formality, in fact I am waiting for a reply on one at the moment, the one we did prior to that (last year) went through no problem.

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By RayM55
11th Aug 2020 08:23

It surprises me a lot and I set up the Clearance Team in 2001. The setting up of a Hold Co to separate the trading assets from non-trade assets has always been one of the most common transactions seen.

Unless there is more to this you should push back and ask for a Tribunal referral.

Protection of assets is and always has been a commercial purpose.

If there is a wider transaction involved say a sale then the position will be different, have you said something that might suggest this is the case?

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By Duhamel
11th Aug 2020 09:27

Yes, I have noticed a change in stance on these types of applications. I believe the clearance team changed over last year and this seems to have led to a change in view on some things.

I have had clearance granted, but usually there are additional questions now.

With respect to RayM55, most practitioners and clients will not be interested in taking this to tribunal (unless there is a lot at stake). My suggestion would be to see if there is a different way to skin the cat or review if there is a different commercial reason down the line.

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Replying to Duhamel:
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By RayM55
12th Aug 2020 08:45

One other quick point, S135 et seq. applies automatically, thus HMRC can invoke S137 only where it can show that there is or will be avoidance of CT or CGT as a result. I can think of no easy circumstances where this would be satisfied in a mere share for share exchange.

As to commercial reasons, this is not defined but realistically unless there is a wider transaction in the planning it is very difficult to see what reasons could fail.

As I said, ask for plain vanilla cases to be referred to the Tribunal but remember the team get thousands of clearance applications every year, the fact that a few produce an unexpected outcome does not mean the wheels are coming off.

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Replying to RayM55:
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By Duhamel
12th Aug 2020 12:55

RayM55 wrote:

One other quick point, S135 et seq. applies automatically, thus HMRC can invoke S137 only where it can show that there is or will be avoidance of CT or CGT as a result. I can think of no easy circumstances where this would be satisfied in a mere share for share exchange.

As to commercial reasons, this is not defined but realistically unless there is a wider transaction in the planning it is very difficult to see what reasons could fail.

As I said, ask for plain vanilla cases to be referred to the Tribunal but remember the team get thousands of clearance applications every year, the fact that a few produce an unexpected outcome does not mean the wheels are coming off.

Thanks for this, I'm sure it helps the OP. Probably will come in useful for me as well.

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By Tax Dragon
12th Aug 2020 10:08

SA2016 wrote:

How will this benefit the sub?

This is an interesting one. The test in statute is "commercial reasons". Is HMRC interpreting that as meaning a trade benefit for a particular company?

That kind of question would be entirely valid in relation to say a share buy-back clearance.... is it possible that HMRC has started to conflate different sets of rules? Does one team deal with all the different sorts of clearances?

If a question is not relevant to the test in point, I'm sure you are 'allowed' to say so.

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blue sheep
By NH
12th Aug 2020 12:52

funnily enough HMRCs response to our latest request has just landed and we seem to have similar questions.

Sounds like someone at HMRC has just taken over the department and is trying to make their presence felt

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By Dib
12th Aug 2020 13:13

Yes, the team has changed almost in its entirety. Martin Roberts, who used to lead the team (which was itself quite experienced) handed over to the new leader, Claire Shephard, and gradually retired from about this time last year until Christmas when he went completely. Almost all of the rest of the team also went and the team base moved from London to Birmingham I understand.

I haven't noticed any change in the team's stance on clearances myself but I was 'at' a lecture given by a well known barrister recently where he said there were issues as described in this thread with big push back on applications on the grounds of commerciality and benefit to the trade. So applications that the old team would pass on the nod are getting held up as additional queries are asked. As my ex-colleague Ray says, s135 et seq applies automatically unless there is an avoidance of CT or CGT motive.

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Replying to Dib:
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By RayM55
12th Aug 2020 13:26

Almost 20 years after I brought it down from Birmingham!

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Replying to Dib:
By pridgway
12th Aug 2020 15:25

The problem continues and Tribunal appear to be agreeing with HMRC.

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Replying to pridgway:
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By RayM55
12th Aug 2020 15:31

You see, you don’t know what you’ve got till it’s gone!

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Replying to RayM55:
By pridgway
12th Aug 2020 15:51

Next time I'll say the reason is we want to ring fence the development of a parking lot.

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Replying to pridgway:
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By Tax Dragon
12th Aug 2020 15:46

pridgway wrote:

Tribunal appear to be agreeing with HMRC.

Do you have a citation?

(It's all very well Ray & Dib saying the sections apply automatically, but if Tribunals are agreeing with HMRC, then carrying out a transaction without obtaining clearance risks having the expected treatment overturned. Removing that risk is the whole point of seeking clearance!)

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Replying to Tax Dragon:
By pridgway
12th Aug 2020 15:56

No, the legislation says if you are refused clearance you can ask the tribunal. It is not an appeal as such but a re-determination on the papers. If the tribunal disagrees then their decision is substituted for HMRC's. There is no appeal from the tribunal. If the tribunal agree with HMRC you have just been refused clearance twice.

Given the current state of play, there is no point going for clearance.

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Replying to pridgway:
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By Tax Dragon
12th Aug 2020 16:06

OK, so HMRC is going to have to take on a case where clearance has been refused but the transaction has happened anyway, or risk looking daft. Not the first time HMRC has backed itself into an awkward corner.

Sounds like I've been a bit lucky with my last few clearances, if it's as bad as you suggest.

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Replying to Tax Dragon:
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By RayM55
12th Aug 2020 16:19

To repeat, HMRC cannot apply S137 unless they can show that tax is being avoided. A mere share for share cannot give rise to the avoidance of tax.

HMRC hardly ever refuse a clearance only on commercial grounds (which assumes) that there is avoidance and even then it was usually only where the reasons were themselves somewhat disagreeable.

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Replying to RayM55:
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By Tax Dragon
12th Aug 2020 16:26

So, to repeat also, refusing clearance therefore makes HMRC look daft.

To explain that a bit....
Clearance is just a statement that the Board is happy that s137 doesn't apply. If the Board is not happy that s137 doesn't apply, it needs to seek to apply it. Otherwise s137 loses any teeth it might actually have, and HMRC's position is worse than it was before.

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Replying to RayM55:
By pridgway
12th Aug 2020 16:31

That may be the case but if you go for clearance and they refuse it and so does the tribunal there is nowhere to go or you just do the transaction anyway. I have just been adding up the number of clearances which I know either personally or anecdotally have been refused in the last 6 months in circumstances where identical trans actions were previously cleared. It's about 25. There might be some double counting, I don't know. Maybe it's a covid thing.

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blue sheep
By NH
12th Aug 2020 15:47

what exactly are HMRC hoping to achieve with this clamp down, I know in the cases we deal with there is not even a whiff of tax avoidance involved, usually it is just so that it makes it easier to move things around a group and for the protection of assets, purely a commercial reason, surely that must be the case in the vast majority of cases?
Seems like HMRC are pointlessly making work for themselves, and I could certainly tell them where their resources could be used to yield a far bigger take, especially after recent events

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By SA2016
13th Aug 2020 07:25

Thanks all for your comments thus far.
Further update, clearance received yesterday for another client (with the exact same information on as other client, referred to in my original question) and clearance was given (by Claire Shephard I might add).

So... the team leader is giving the clearance but her colleagues aren't?!

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Replying to SA2016:
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By RayM55
13th Aug 2020 07:52

Such a situation cannot arise and all the more reason to request that the application is referred to the Tribunal. HMRC and the Tribunal will soon tire of the extra pointless work if this is more than an isolated occurrence.

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blue sheep
By NH
13th Aug 2020 07:33

Is this also the case with other clearance requests such as those under sections 1033 - 1048 Corporation Tax Act (CTA) 2010 relating to company share buybacks?

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Replying to NH:
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By Tax Dragon
13th Aug 2020 10:09

I think some of those questions are fair for a buyback (the tests are different), as I noted in my first post above - and I am aware of them having been asked.

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By gogzyb
18th Sep 2020 10:22

I have had a similar refusal of clearance for a vanilla transaction to insert a holding company to protect excess cash from creditors for future use in the business.

HMRC stated that "You are simply trying to pass cash to the shareholders whilst retaining within a corporate wrapper".

I have appealed to the FTT on the basis that "We are not trying to pass any cash to the shareholder, we are trying to retain cash within the Group and protect from creditors. The shareholders will not benefit from the proposed transaction whatsoever and will pay income tax on any dividends that are received from Holdco".

Will see what the FTT has to say - what a farce, Martin Roberts' team would never have refused clearance in these circumstances.

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Replying to gogzyb:
blue sheep
By NH
18th Sep 2020 10:33

As you say, an absolute farce, and a complete waste of time and resources for all concerned

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Replying to gogzyb:
By pridgway
18th Sep 2020 10:54

Isn't that just a contradiction in terms? Passing it back whilst retaining it? And where is the avoidance of CGT or CT?

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By James Mc
23rd Oct 2020 14:44

One refusal, which I've asked to be referred to Tribunal, plus 2 which have been kicked back with further questions, in the last couple of months. It may or may not be significant, but all have come from the same individual. All are 'plain vanilla transactions'. Two identical scenarios, where clearance was applied for at broadly the same time, have sailed through.

The latest query letter asks for details if the holding company "is to perform a function rather than an activity". Also, because I stated that the rationale was the protection of the business, he's asked us to elaborate upon "why protection is needed and how the transaction will achieve it."

Finally could we "please provide details of the relationships between the 3 shareholders who all share a surname".

I am staggered by some of this, being honest!

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Replying to James Mc:
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By RayM55
23rd Oct 2020 15:18

This does sound like complete nonsense!

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Replying to RayM55:
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By James Mc
23rd Oct 2020 15:50

Thanks Ray, glad it's not just me that thinks that.

I have just responded to the "points" raised. Although a forlorn hope I fear, I did add a paragraph to say that, if there were particular areas of concern I would be delighted to have a telephone conversation. Given that I am anticipating further applications between now and Christmas, it may save time on both sides if we could understand what their issues are.

I am not optimistic such a call will take place, but I feel we should show willing!

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Replying to James Mc:
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By RayM55
23rd Oct 2020 16:55

It may simply be that with a new team in place they are taking the wrong course and making a rod for their own back. Many of the questions may be to get some movement to meet the time limit. In the old days missing a time limit meant a written report to the Board.

Remember to actually apply S137 HMRC must show *both* that the transaction is not bona fide and a main purpose of the transaction is the avoidance of CGT and CT. To succeed HMRC need to show that there is something more to the transaction, they cannot assert that the exchange amounts to avoidance. So most typically cash is part of exchange and the client retains control, the taxpayer will be outside the charge post the exchange (not always bad).

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Replying to RayM55:
Psycho
By Wilson Philips
23rd Oct 2020 17:03

RayM55 wrote:

Remember to actually apply S137 HMRC must show *both* that the transaction is not bona fide and a main purpose of the transaction is the avoidance of CGT and CT.


I disagree. It is the other way around.

s137 says that s135 (or s136) will not apply unless the transaction is undertaken for bona fide commercial purposes and does not form part of a scheme or arrangement ...

The "and" is important. If the transaction fails either of the two conditions it fails both.

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Replying to Wilson Philips:
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By RayM55
24th Oct 2020 09:09

HMRC has precedent in its files to show clear Solicitors advice that it is almost impossible for S137 to be applied on the bona fide commercial point alone. Indeed I suggest that it is very difficult to describe a transaction of this sort that would fail the first leg. It is critical to the operation of S137 that the transaction will result in the avoidance of tax (CGT or CT). Equally I have seen very few transactions were the bona fide commercial leg was ever seriously in doubt in circumstances where there was no suspicion of avoidance, the two go together in my view.

The issue here (obviously without seeing the applications in question) is HMRC putting what appear to be plain vanilla transactions on the naughty step. Having been responsible for some 15,000 clearance requests in my time, not to mention hundreds of applications post HMRC, refusing clearance in the type of situations discussed in this forum is incorrect. However, it remains the decision of the team leader and it needs a coordinated response to straighten out what is going on.

As I understand it the number of clearance applications has increased substantially and if that is correct than they will be receiving perhaps 7,000 a year or more leaving very little time per application. The last thing HMRC needs is a large number of pointless refusals with the additional work involved and if the team is inexperienced they might just need some time to settle down.

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Replying to RayM55:
Psycho
By Wilson Philips
24th Oct 2020 09:44

Whatever the solicitors advice may be, that does not follow a proper construction of the language of s137. S137 is not an active provision but a prohibitive provision.

S135 (and s136) will not apply unless the transaction is undertaken for bona fide commercial reasons and is not part of a scheme etc. The only proper interpretation of that is that if either leg is failed they are both failed. It might be the case that HMRC have in the past found it difficult to break the commercial reason leg but that’s not the same thing.

I agree that if the transaction involves tax avoidance then almost by definition it will also fail the commercial reason test. However, the reverse does not automatically apply. My point was although that it may be more common than not for the two to go hand in hand there is no legislative onus on HMRC to demonstrate both.

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Replying to Wilson Philips:
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By RayM55
24th Oct 2020 10:20

I am sorry to disagree but you miss the point, at a practical level it is very hard in reality to show that a transaction is not bona fide commercial since the directors have a fiduciary duty to safeguard the assets of the company and act in its best interests.

For that reason a transaction that was likely to fail the first leg would be both highly unusual and easy to spot. So where the transaction is intended to create a group so that the assets can be more effectively managed and safeguarded, that is a bona fide commercial decision on the part of the directors.

For that reason the emphasis has always been (rightly) on the second leg.

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Replying to RayM55:
Psycho
By Wilson Philips
24th Oct 2020 10:37

I think the problem is the way you phrased your earlier comment, which I concede I may be guilty of taking too literally. What you appear to be saying is that HMRC effectively have to demonstrate tax avoidance, which will invariably also cause the commercial reason test to fail. I don’t have a problem with that.

And in practice that may well be the case.

But it is still not the same as saying that HMRC must demonstrate both, which is what you said.

You gave an example of a group. What about the (admittedly hypothetical) case of the business owner that decides to create a group just because his mate has one and it sounds like a good idea but can’t come up with a sound commercial reason for doing so?

But I think we are agreed on the practical implications here - pedant that I am, I’m just taking you to task over your earlier phraseology :-)

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By Justin Bryant
23rd Oct 2020 17:14

This problem is actually old news now (since late last year I think), and there was a very good webinar earlier this year by Alun James highlighting this new personal/commercial zeitgeist from HMRC's new clearance team.

As to practical solutions, you just need to warn clients, persevere with Tribunal referrals if necessary and perhaps suggest car park development possibilities (or some equivalent commercial (or at least non-personal looking) reason) as mentioned above.

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