A tax clearance is a procedure by which a taxpayer considering making a transaction obtains the agreement of HM Revenue and Customs (HMRC) that the tax effects of the transaction are what the taxpayer believes them to be. A clearance allows certainty regarding the tax treatment to be obtained before the transaction takes place.

It was announced in the 2007 Pre-Budget report that improved procedures for clearances would be made available to all businesses, with effect from 1 April 2008. HMRC have produced a guidance note on the revised clearance process.

Obtaining a clearance is often advisable when a transaction’s tax consequences are ambiguous or debatable. When a clearance application is sought, HMRC have stated that they aim to give a decision within 28 calendar days, although in complex cases this may take longer.

Whilst it is unwise to let the tax tail wag the dog, the new procedure allows smaller businesses to obtain a degree of certainty, regarding the tax effects of transactions, which was not available hitherto.

The guidance note can be found at http://www.hmrc.gov.uk/cap/links-dec07.htm.