INTM214120 - How the CTSA regime works for Controlled Foreign Companies
Clearances: general
Background to the current system
The role of HM Revenue & Customs in providing advice and/or clearances on various aspects of the controlled foreign company legislation has been recognised since the introduction of the legislation in 1984 as an important practical component of the operation of the system.
Prior to the introduction of the legislation requiring companies to include details of controlled foreign company tax liabilities in their returns (FA98/S113 and FA98/SCH17), a dual system of advice and clearances on specific issues was operated. Shortly after the introduction of the controlled foreign company legislation, a Press Release (dated 16 July 1984) was published stating that a unit would be available to provide advice on technical points in the interpretation of the legislation applying to existing and proposed (but not hypothetical) structures and advance clearance where shares in a controlled foreign company were sold.
The informal system became more structured in 1994. FA94/S134, which required non trading Controlled Foreign Companies to distribute 90% of their chargeable profits if they intended to benefit from the Acceptable Distribution Policy ('ADP') exemption, was the catalyst for the introduction of an advance clearance procedure. This was applicable to non trading companies which may be excluded under the exempt activities or motive tests (see Press Release dated 9 November 1994). This procedure was extended to trading companies when FA96/182 and FA96/SCH36 applied a similar requirement to all other Controlled Foreign Companies (Budget Press Release. IR37 - 28 November 1995).
The significant role to be performed by a clearance procedure was recognised in the two consultative documents on controlled foreign company reform where it was proposed that the procedure be extended to all aspects of the legislation. This is intended to have the dual benefit of ensuring consistency of treatment and reducing potential compliance costs. (Clearances given under the old system will continue to run under self assessment provided the relevant facts and law remain unchanged.)
What the new system aims to do
The system aims to provide certainty to United Kingdom companies as to the application of the controlled foreign company legislation to a particular set of facts, and enable areas of doubt or difficulty to be resolved before the companies are required to complete the controlled foreign company supplementary page to their self assessment tax returns.
The clearance procedure builds on the existing administrative approach allowing both flexibility and speed of operation. HMRC will work to a 28 day turnaround target from receipt of the application provided all relevant information is included. If there is a particular need for a clearance decision to be given by a specific date, companies can specify this in their applications. HMRC will do its best to meet reasonable requests but more time may sometimes be needed where for instance particular additional expertise is necessary.
A clearance will state the terms on which it is given, and will normally apply indefinitely, provided the relevant underlying facts and legislation remain unchanged. The HM Revenue & Customs will be bound by clearances when all the relevant facts are accurately given. Where a clearance cannot be given, HMRC will state the reasons. If a company disagrees with HMRC view on a clearance, it will be free to make its self assessment on its own understanding of the law and appeal in the normal way against any amendment to the self assessment which HMRC may make. A standard clearance letter is reproduced at INTM214140.
The continued application of the clearance may be reviewed by the local inspector on occasions to ensure that the facts and circumstances remain the same. However, companies should notify their inspector if there have been any material changes to the facts or projections in the original application for clearance which may have a bearing on the continued existence of the clearance. Failure to do so may render the United Kingdom interest holder liable for penalties under FA98/SCH18/PARA20 if a return is submitted which relies on a clearance which, because of significant changes in the facts or the law, is no longer appropriate.
When and to whom the system applies
The clearance procedure commenced in respect of applications submitted after 1 January 1999, that is 18 months before the first United Kingdom companies were required to submit their returns under CTSA. All United Kingdom interest holders are entitled to request clearance in respect of potential controlled foreign companies. Where there is more than one United Kingdom interest holder, a clearance application may be made by one on behalf of the others. Clearances for companies in which venture capital limited partnerships (see INTM208260) hold shares may be made by the manager of the partnership.
Issues on which clearance may be requested
United Kingdom companies may request clearance as to the way any area of the controlled foreign company legislation applies in respect of a particular case. Clearance will not be available on matters that are outside the controlled foreign company legislation, such as the computation of chargeable profits.
