Commissioners for HM Revenue and Customs v Development Securities Plc and Others
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 2020 |
| Neutral Citation | [2020] EWCA Civ 1705 |
| Year | 2020 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 1705
Lord Justice David Richards, Lord Justice Newey and Lord Justice Nugee
Court of Appeal (Civil Division)
Corporation tax – Corporate residence – Central management and control – Taxpayers were special purpose vehicles incorporated in Jersey for purposes of a tax planning scheme- whether directors were acting under instruction from other parties – Whether Upper Tier Tribunal was correct to conclude the First Tier Tribunal had fundamentally misunderstood the nature of the transactions and the duties of the directors – UT was not correct – FTT conclusion that companies resident in UK to stand – HMRC's appeal upheld – Corporation Tax Act 2009, s. 5.
The Court of Appeal held that the Upper Tribunal's reasons for setting aside the First Tier Tribunal's conclusions that the taxpayer companies, which were incorporated in Jersey, were centrally managed and controlled in the UK, were not well founded. The UT was not justified in setting aside the FTT's decision for the reasons the UT gave. The FTT had made a finding of fact that the directors of the Jersey companies were acting under instructions from parties in the UK and the FTT was entitled to conclude central management and control (CMC) was being exercised from the UK on this basis.
The Court of Appeal overturned the decision in the Upper Tribunal case of Development Securities plc [2019] BTC 518. This itself was an appeal from the First Tier Tribunal case of Development Securities (No. 9) Ltd [2017] TC 06007.
The taxpayers were Jersey incorporated companies established to undertake a tax planning scheme related to augmenting corporate capital losses. By the time the issue had reached the FTT it had been concluded that the planning would succeed if the taxpayers were resident in Jersey. The question of tax residence, by virtue of where CMC was exercised, has been the only issue before the Courts.
The FTT had concluded that the taxpayer companies were centrally managed and controlled from the UK. Central to that conclusion had been that the transactions had no commercial benefit for the taxpayers. The FTT was of the view that the Jersey directors had acted under direction from the UK. In the UT, by contrast, it was held that the transactions were not “uncommercial” as the taxpayers had been funded by the UK parent, had suffered no detrimental effects of the transactions, the directors were entitled to consider benefits to the parent company, the directors had spent time considering the transactions and had satisfied themselves the transactions were legal. The UT considered the FTT had failed to understand the director's duties under Jersey law, and in the circumstances there had been no “usurpation” of the Jersey boards by other parties. The UT therefore allowed the taxpayers appeal, with the result they were considered tax resident in Jersey.
Lord Justice Newey gave an extensive judgement, in which he first reviewed the case law regarding corporate residence, starting with the leading case of De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) (1906) 5 TC 198, and covering various other cases through to the Australian case of Bywater Investments Ltd v Commissioner of Taxation [2016] HCA 45. Usefully, Lord Newey then provided a summary of what he considered the key points from the authorities:
- The overarching principle is that a company resides for tax purposes where its real business is carried on, and that is where CMC actually abides;
- The principle applies in relation to subsidiaries, including special purpose vehicles;
- It is the actual place of management, not that in which it ought to be managed, which fixes the residence of a company;
- A company may be resident in a jurisdiction other than that of its incorporation not only where a constitutional organ exercises management and control elsewhere, but if the functions of the company's constitutional organs are usurped, in the sense that management and control is exercised independently of, or without regard to, its constitutional organs, or if an outsider dictates decisions (as opposed to merely proposing, advising and influencing decisions);
- On the other hand, CMC of a subsidiary will not be taken to be in a jurisdiction other than that of its incorporation just because it is following a tax planning scheme propounded by its parent. Nor need it matter that a company's board takes decisions without full information or even in breach of the directors' duties;
- Events before or after the particular date in question may be relevant as casting light on the position on that date; and
- Where a company is resident is essentially a question of fact.
Lord Newey then analysed the FTT decision. He noted that the FTT had not considered the directors of the Jersey companies had acted “mindlessly”, and that the FTT accepted that the directors had known the effect of the actions they were taking. Moreover, the analysis showed that the FTT had disavowed any suggestion of improper action by the directors. The FTT had distinguished the situation from that of Wood v Holden (HMIT) [2006] BTC 208 where a transaction had been considered and undertaken for the benefit of the taxpayer company; in the current case the FTT had seen no commercial benefit for the company and any benefit was for the parent. The FTT had thus reached the “inescapable conclusion” that the Jersey boards were acting under instruction from the UK, and were “rubber-stamping” UK decisions. The FTT had concluded that the Jersey directors had been engaged (in the sense of taken on by the parent company) with the purpose of approving the transactions, subject to the directors concluding they were legal. In the FTT's eyes, this was supported by the Jersey directors readily resigning shortly after the transactions, and being replaced by UK directors.
Lord Newey then analysed the UT's decision for allowing an appeal. The UT had observed that the FTT did not consider the case to be on of “usurpation or sham”, but rather that it was a case of “abdication of CMC”. The UT had stated the FTT had a primary reason for reaching its decision. In short, this was that the Jersey directors knew their appointment as directors would result in the taxpayers taking uncommercial decisions, and from this inference could be taken that CMC resided elsewhere. The UT had also noted a “subsidiary” reason for the FTT's decision, which was that the directors had a specific task entrusted to them, after which they were to resign.
The UT had found the FTT's reasoning had an “essential incoherence”. The UT had noted that the Jersey directors had clearly discussed the arrangements at some length, had not breached any of their duties under Jersey law, and they were entitled to consider the shareholder's interests. The UT had considered that the FTT had mischaracterised requests from the parent as instructions, and had focused on what they regarded as the “uncommerciality” of the arrangements rather than the director's actual duties. As to the uncommercial nature of the arrangements, the UT had noted that, as the parent funded the taxpayers, the taxpayer companies were not harmed by the arrangements, and thus, the UT had found, the FTT had fundamentally mis-understood the arrangements. The UT had concluded that the FTT had erred in law, and the appeal should be allowed.
Lord Newey, supported by the other two judges, could not accept the analysis of the UT. The “primary reason” given by the UT for the FTT's decision was not, in the Court of Appeal's view, the main reason the FTT had reached its decision. The UT had also been wrong to suggest that the FTT's decision was based on the director's failing to stop something improper or inadvisable happening – the FTT had not suggested the transactions were improper or inadvisable. Thirdly, The FTT had not mis-understood the nature of the arrangements. Nor had the FTT suggested that the directors had acted against their actual duties. Additionally, the FTT had looked at what the directors actually did, rather than their obligations, in determining where CMC lay. For these reasons, the UT's discussion of the Jersey director's duties, which formed much of the basis for its decision, were “beside the point”.
In regarded to whether the FTT had misunderstood requests for instructions, the Court of Appeal found this was not the case. The FTT had made a finding of fact that the directors had acted under instruction, based on the evidence provided. Moreover, in the Court of Appeal's view, the UT had “not appreciated the essential basis” of the FTT's decision. The FTT had explicitly said it did not think the directors had acted “mindlessly”, whilst at one point the UT seemed to think the FTT had suggested this; and the Court of Appeal considered that the UT did not recognise the significance of the findings of fact the FTT had made.
Accordingly, the UTT's criticisms of the FTT were not well founded; it was not justified in setting aside the FTT's decision, and the appeal should be allowed.
The striking aspect of this judgement is that it is less about the Court of Appeal upholding the FTT's reasoning, and more about the Court rejecting the UT's approach to the case. Essentially, The Court of Appeal concluded that the UT had not understood the basis for the FTT's decision, and therefore, the UT's reasons for granting an appeal were flawed. Given that the Court of Appeal concluded that the UT misdirected itself, the Court of Appeal did not explicitly discuss the factors that govern tax residence, although Lord Newey's summary of the key points may prove useful in future cases. It is worth noting that Lord Nugee, in his judgement, although agreeing that the UT had incorrectly allowed an appeal, expressed some reservations about the FTT's reasoning. In his view the Jersey boards had made decisions on behalf of the taxpayers. Lord...
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