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Mark McLaughlin CTA (Fellow) ATT TEP considers whether advice and rulings from HMRC are as helpful as they seem.

Introduction

Practitioners will no doubt be painfully aware that tax law (and its application in practice) is full of uncertainties and ‘grey areas’. However, there are probably more opportunities than ever before to obtain clearances and rulings from HMRC on the tax treatment of various transactions. These include:

• HMRC Code of Practice 10 - ‘Information and Advice’ (see COP10 - HMRC Code of Practice 10 - Information and Advice);
• Statutory Clearances, such as in respect of purchases of own shares by unquoted trading companies, or company reorganisations and demergers (see Statutory Clearances);
• VAT rulings (see VAT Notice 700/6);
• An informal clearance service for businesses (see Clearance Service for Businesses - How to Get Certainty on Significant Business Tax Issues); and
• An Inheritance Tax clearance service for business owners (see Inheritance Tax (IHT) Clearance Service for Business Owners).

Of course, it is important that applications for advice, rulings and clearances are properly made. It is equally important that HMRC’s response is retained on file and, if given verbally, is immediately recorded in writing.

Verbal advice

VAT Notice 700/6 poses the question “What is the best way to get advice?” It then states:

“We recognise the importance for taxpayers and their advisers of being able to acquire timely and accurate advice and rulings in respect of VAT. Most enquiries can be dealt with by phoning our advice service. But for your own protection, you should put any major issues and more detailed questions in writing” (emphasis added).

The recent VAT case Corkteck Limited v HMRC [2009] EWHC 785 (Admin) underlines the limitations in the reliability of advice given verbally by HMRC, and the importance of keeping a record of what was actually said. In that case, the company’s director contacted HMRC’s National Advice Service (NAS) about the correct VAT treatment of certain transactions, which the company subsequently treated as zero-rated. During a subsequent VAT inspection, it came to light that the wrong VAT treatment had been applied. As a result, Corkteck was assessed for VAT of over £315,000, plus interest and a surcharge.

Unfortunately, the director’s account of the telephone conversation differed from the notes made by the HMRC officer’s computer note, which was apparently made during or immediately after the conversation. The Court therefore had to consider whether to accept the director’s recollection of the conversation with the HMRC officer, or whether it preferred as evidence the written note of the conversation by the HMRC officer. The Court held that the written note was the best evidence of what was actually said in the conversation. The taxpayer’s appeal was therefore dismissed.

Perhaps more significantly, the Court held that even if the taxpayer’s account of the conversation with the NAS officer had been accepted, it could not reasonably be relied upon. Sales J said: “The NAS was only held out as a source of “general advice”…rather than as a source of binding rulings on the proper tax treatment of specific transactions.” The Court ruled that verbal advice from HMRC would only be binding in “very exceptional circumstances”. The moral of this case is that obtaining verbal advice from HMRC is probably best avoided if at all possible, or otherwise should be followed up in writing.

Non-statutory business clearances  

The ‘Non-statutory clearances service for HMRC business customers’ was originally launched on 1 April 2008. HMRC’s stated aim is that the service should provide certainty for businesses and their advisers “…where there is demonstrable material uncertainty about the tax consequences of transactions affecting their business.”

My practical experiences of using this service have been largely positive. However, from my discussions with practitioners, applications for non-statutory clearances have seemingly not been widely made since the facility was introduced. This is slightly surprising, although part of the reason may be a lack of awareness by practitioners as to the availability and scope of the service.  

Of course, applying for clearance can be something of a double-edged sword. The facility is all well and good if HMRC’s clearance is favourable. Unfortunately, taxpayers or practitioners who do not obtain the response from HMRC that they were hoping for are largely stuck with it. There is no general right of appeal against advice or clearances, except in certain specific circumstances provided in statute.        

Follow the instructions

Whichever type of advice, ruling or clearance is sought from HMRC, it is important to closely follow the relevant HMRC guidance on making the application, such as the format and content of statutory clearance applications. The guidance will also invariably state the specific circumstances in which HMRC will (and will not) be bound by a particular ruling or clearance application.

Applications should be drafted very carefully. Practitioners should follow the principle established in R v Inland Revenue Commissioners, ex p. MFK Underwriting Agencies Ltd ([1989] STC 873) that the taxpayer “…should have put all his cards face upwards on the table”. It goes without saying that if an application is materially incomplete or incorrect, any clearance or ruling given by HMRC on the basis of that application cannot be relied upon.