HM Revenue and Customs (HMRC) has historically only provided a taxpayer with a binding ruling on the application of tax law to the taxpayer’s transaction where it related to legislation passed in the last four Finance Acts; the application of double tax treaties; the distinction between self-employment and employment income; statements of practice and extra statutory concessions; or a matter of major public interest.
Following a period of consultation and a pilot scheme HMRC has announced an extension to the circumstances in which it will give a binding ruling to businesses albeit that where it relates to legislation enacted more than four Finance Acts ago it will be necessary to demonstrate that there is both a “material uncertainty” surrounding the application of the legislation and that the issue is “commercially significant” to the taxpayer’s business. The new regime operates from 1 April 2008.
Outlined below are the key features of the new regime:
- It is only available for business tax issues. Personal tax issues will continue to be dealt with on the same basis as before.
- Where there is “material uncertainty” in relation to a matter within the last four Finance Acts a ruling will be given without having to demonstrate that it relates to an issue of “commercial significance” but where it relates to older legislation the “commercial significance” to the business will have to be demonstrated. Satisfaction of this test will be determined by reference to the scale of the business and the impact of the issue on it. This test is the key to ensuring that applications for rulings do not swamp the resources of HMRC.
- In addition to post transaction rulings HMRC will give a pre-transaction ruling where evidence is given that the transaction is genuinely contemplated.
- Where the Large Business Service deals with the affairs of the applicant taxpayer, an application should be addressed to the Client Relationship Manager. In other cases applications are made to a clearances team.
- HMRC guidance sets out in detail what it expects to be included in an application. In broad terms the application must set out fully: specified information about the taxpayer, information about the transaction or transactions that are the subject of the application, information about the commercial background of the transaction(s) and the taxpayer’s views on the legal analysis and the areas of uncertainty. In its guidance HMRC expands upon its requirements under these heads while recognising that the information and the extent of the information supplied will depend upon the circumstances of the application.
- HMRC aims to reply within 28 days although for “complex cases” this may take longer. This will usually be where HMRC needs to obtain a number of specialist views within HMRC. In addition, failure to provide sufficient information will also delay a response from HMRC. Where HMRC refuses an application it will specify why. For example, HMRC will not accept an application where it considers that it relates to tax planning or is designed to obtain a tax advantage and is not therefore “commercially motivated”.
By its nature tax legislation can be both complex and uncertain in scope. The facility to obtain the view of HMRC on the application of tax legislation to a transaction or activity can in appropriate circumstances be of real benefit to a business. The new regime does not mean that a business can obtain a ruling on any tax issue at all; there needs to be a “material uncertainty” and either the tax legislation needs to be new (last four Finance Acts) or be “commercially significant” to the taxpayer’s business. It must also be remembered that full and proper disclosure of information must be given if a ruling is to be binding on HMRC. Therefore, care should always be taken in preparing an application for a ruling both to ensure a speedy response and one that can be relied upon.
