In Development Securities and others v HMRC [2019] UKUT 169 (5 June 2019), the UT reversed the FTT’s decision and found that subsidiaries set up in Jersey, for the purpose of a tax avoidance scheme, were resident there.
A group of companies had implemented a plan designed to crystallise latent capital losses and it was essential to the success of the planning that the appellant companies were resident in Jersey and not the UK in the relevant period. The issue was therefore whether the Jersey companies had been UK tax resident in that period.
The UT observed that a ‘classic multi-factorial’ approach was required and that it should be slow to interfere unless the FTT has erred in principle. The tribunal referred to the place of ‘central management and control’, as set out in De Beers Consolidated Mines [1906] AC 455, as the ‘starting point’ when determining a company’s residence.
It observed that the mere fact that a 100% owned subsidiary carried out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent, did not mean that central management and control was vested in the parent; one must distinguish between influence over the subsidiary and control of the subsidiary. The UT added that this was a question of fact and degree.
The FTT had found that the directors had entered into uncommercial decisions under the scheme so that they had abdicated responsibility for management and control. However, the UT found that the Jersey companies had not acquired assets on uncommercial terms, ‘in the sense that they were economically disadvantaged’. Whilst the relevant assets were acquired at an overvalue, the overpayment by the Jersey companies was not funded by them. In addition, the directors had acted in accordance with their duties; they had regard to the best interest of their only shareholder.
The UT concluded that ‘the essential error’ committed by the FTT had been to focus on the uncommerciality of the transactions to the individual Jersey Companies without having regard to the actual duties of the directors, which involved consideration of the shareholder’s interest.
Why it matters: The UT observed that: ‘The scheme was, as the appellants candidly admitted, a tax planning or tax avoidance scheme.’ However, HMRC had abandoned its argument that it failed under the Ramsay doctrine. The fact that the Jersey companies had been incorporated for tax avoidance purposes was therefore irrelevant to the issue of their residence. Similarly, the UT found that there was an ‘essential incoherence’ in the FTT’s reasoning. The FTT had acknowledged that the Jersey directors would have refused to act illegally, yet maintained that they had acted in breach of their duties.
In Development Securities and others v HMRC [2019] UKUT 169 (5 June 2019), the UT reversed the FTT’s decision and found that subsidiaries set up in Jersey, for the purpose of a tax avoidance scheme, were resident there.
A group of companies had implemented a plan designed to crystallise latent capital losses and it was essential to the success of the planning that the appellant companies were resident in Jersey and not the UK in the relevant period. The issue was therefore whether the Jersey companies had been UK tax resident in that period.
The UT observed that a ‘classic multi-factorial’ approach was required and that it should be slow to interfere unless the FTT has erred in principle. The tribunal referred to the place of ‘central management and control’, as set out in De Beers Consolidated Mines [1906] AC 455, as the ‘starting point’ when determining a company’s residence.
It observed that the mere fact that a 100% owned subsidiary carried out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent, did not mean that central management and control was vested in the parent; one must distinguish between influence over the subsidiary and control of the subsidiary. The UT added that this was a question of fact and degree.
The FTT had found that the directors had entered into uncommercial decisions under the scheme so that they had abdicated responsibility for management and control. However, the UT found that the Jersey companies had not acquired assets on uncommercial terms, ‘in the sense that they were economically disadvantaged’. Whilst the relevant assets were acquired at an overvalue, the overpayment by the Jersey companies was not funded by them. In addition, the directors had acted in accordance with their duties; they had regard to the best interest of their only shareholder.
The UT concluded that ‘the essential error’ committed by the FTT had been to focus on the uncommerciality of the transactions to the individual Jersey Companies without having regard to the actual duties of the directors, which involved consideration of the shareholder’s interest.
Why it matters: The UT observed that: ‘The scheme was, as the appellants candidly admitted, a tax planning or tax avoidance scheme.’ However, HMRC had abandoned its argument that it failed under the Ramsay doctrine. The fact that the Jersey companies had been incorporated for tax avoidance purposes was therefore irrelevant to the issue of their residence. Similarly, the UT found that there was an ‘essential incoherence’ in the FTT’s reasoning. The FTT had acknowledged that the Jersey directors would have refused to act illegally, yet maintained that they had acted in breach of their duties.
