Magma Chartered Accountants recently took the highly unusual step of appealing HMRC’s refusal to provide a tax clearance to the First Tier Tax Tribunal. That decision was however vindicated and HMRC were overruled.

One of Magma’s clients had surplus cash on its balance sheet and anticipated more to come from an ongoing profitable trade. The individual shareholders had differing views on how best to invest this money and came to Magma for guidance on the matter.

What did Magma suggest?
Magma’s advice was to consider establishing individual ‘cash box’ companies for each shareholder, within the existing group structure. This would allow surplus cash to be distributed from the trading company to each ‘cash box’ company in a tax-free manner; shareholders could then independently invest the funds safely away from the current business.

Critical to the benefit of such an exercise would be a prior tax clearance from HMRC, essentially asking them to approve the ‘bona fide commercial reasons’ for the proposed and that tax avoidance would not be in point.

What happened?
HMRC denied Magma’s initial tax clearance made on our client’s behalf – unfairly in our view.  HMRC were particularly focused on the outcome of the transaction rather than the rationale, contending that the benefits were personal and not commercial.

Magma queried this at length with HMRC, then asked for the decision to be reviewed by a more senior Officer within the HMRC clearance team, without joy.   The only remaining recourse was to formally appeal HMRC’s decision before the Tax Tribunal.

We did. The tribunal agreed with Magma’s arguments and found in favour of our clients, meaning the desired transaction was able to proceed as planned with a positive tax clearance.

The lessons
The verdict in this case highlights a tightening of HMRC’s approach in granting tax clearances.

Business restructuring transactions can contain both personal and commercial objectives – just because there are personal benefits, does not preclude a commercial rationale for the purposes of obtaining a positive tax clearance.

Magma’s tax team are well versed in both business restructurings and in handling HMRC. A practical and commercial approach, coupled with deep technical understanding and some real tenacity, is a great recipe for results.   To find out more, please contact our tax team on 01788 539000 or email [email protected].