Development Securities (No. 9) Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 July 2017 |
| Neutral Citation | [2017] UKFTT 565 (TC) |
| Date | 14 July 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0565 (TC)
Judge Harriet Morgan, Member: Mrs Janet Wilkins
Mr Sam Grodzinski QC and Mr Julian Hickey, counsel, appeared for the appellant
Mr Akash Nawbatt and Ms Kate Balmer, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Whether the appellant was resident outside the UK – Held central control and management was exercised in the UK – Appeal dismissed.
The First-tier Tribunal (FTT) found that three Jersey companies established as part of an arrangement designed to crystallise enhanced capital losses were resident in the UK on the basis that central management and control was exercised in the UK.
DS Jersey (No. 1) Ltd (DS1), DS Jersey (No. 2) Ltd (DS2) and DS Jersey (No. 3) Ltd (DS3) were incorporated in Jersey on 10 June 2004 as subsidiaries of Development Securities plc (DS plc). The companies were set up by Volaw Trust and Corporate Services Ltd, a Jersey Company (Volaw). The initial shareholders were nominees provided by Volaw, who held the shares for DS plc as the beneficial owner.
The board of directors of each of the Jersey companies comprised three Jersey based and tax resident directors provided by Volaw and a UK based and tax resident director who was the company secretary of the Development Securities group (DSG).
The tax planning involved UK member companies of DSG granting call options which entitled DS1 to purchase shares in certain property owning companies, DS2 to purchase property at Sheffield and DS3 to purchase property at Bexleyheath. All of the assets subject to the options were standing at a loss as the values had fallen since acquisition by DSG.
The exercise price of the options was the historic base cost plus indexation accrued to that time. The exercise prices were considerably more than the market values. If the Jersey companies were not UK tax resident, the UK members of DSG would not have a tax charge on the sales of the assets to the Jersey companies and the Jersey companies would be treated as acquiring the assets for the price paid rather than the market value of the assets. When the Jersey companies sold the assets, the assets would be standing at a larger loss as the loss would be increased by the indexation element included in the price paid.
On 11 June 2004, a proposal was put to the boards of DS1, DS2 and DS3 that UK member companies of DSG would grant them call options, which (if certain conditions were satisfied) would entitle them to purchase assets. It was envisaged that if the options were exercised, DS plc might be willing to make capital contributions to assist the purchases.
On 25 June 2004, the boards of DS1, DS2 and DS3 agreed to execute the call options having received a resolution issued by the beneficial owner (DS plc) approving the transaction and notifying the boards that it was for the benefit of the companies. A letter of intent was received from DS plc that it would consider making a capital contribution, although it did not make a contractual commitment to do so. The exercise of the options was conditional on the FTSE Real Estate Total Return Index closing at 2082 or above for at least five consecutive days in a specified period and approval by DS plc.
On 12 July 2004, the boards of DS1, DS2 and DS3 exercised the options, noting that the conditions had been met and requested DS plc to provide the funding. The boards also resolved to make VAT and tax applications (such as in respect of the non-resident landlord scheme) in respect of the properties.
On 20 July 2004, the Jersey directors resigned and additional UK directors were appointed “for administrative convenience”. Once it was considered that DS1, DS2 and DS3 were UK tax resident, steps were taken by the companies to sell or dispose of the assets to trigger a capital loss.
The DSG companies were appealing against decisions made by HMRC in October 2014 to deny the benefit of various loss relief provisions. The case concerned whether DS1, DS2 and DS3 were UK tax resident in the period from incorporation until 20 July 2004 and this involved deciding where the central management and control of the companies was carried out.
The appellants sought to rely on the case of Wood v Holden (HMIT) [2006] BTC 208. The tribunal noted that Wood v Holden established that no different principles are applied simply because a company was formed for a specific or limited purpose.
However, the tribunal distinguished the facts in the present case from that in Wood v Holden on the basis that the transactions undertaken by DS1, DS2 and DS3 were inherently uncommercial for the companies themselves. The Jersey directors did seek advice on the legality of the arrangements, but that did not amount to a strategic decision on whether it was a good plan for the companies to implement the tax planning by acquiring assets at an overvalue. The tribunal considered that the decision to acquire the assets was made by DS plc and the directors merely gave their formal approval (having confirmed that there was no legal impediment) as they were instructed to do. Given that the transaction was not in the interests of the companies and could only take place with parental approval, a line was crossed from the parent company influencing and giving strategic or policy direction to the parent company giving an instruction.
The tribunal also pointed to the fact that the boards of DS1, DS2 and DS3 did not engage with the decision to move the central management and control back to the UK (although the tribunal considered that it was always in the UK in any event). The recorded reason for the change of directors of “administrative convenience” had been suggested by DSG's advisers. The tribunal considered that the Jersey directors resigned because they had fulfilled the function they were engaged to undertake in accordance with DS plc's instructions.
The tribunal decided that the key decisions to acquire the assets at an overvalue and to move control of the companies to the UK were taken by DS plc in the UK and therefore the acts of central managements and control of DS1, DS2 and DS3 took place in the UK. The tribunal concluded that DS1, DS2 and DS3 were resident in the UK for tax purposes for the period from incorporation until 20 July 2004, and therefore dismissed the appeals.
The UK parent company and its advisers had taken pains to step back and not be involved in decisions made by the boards of the Jersey group companies that were the subject of this case. Despite this, the fact that the transactions entered into by the Jersey companies were uncommercial and were only for the benefit of the parent company or the wider group and that the Jersey directors appeared to be “rubber stamping” the decision to move control to the UK indicated that central management and control took place in the UK and therefore that the Jersey companies were resident in the UK for tax purposes.
[1] The appellants have appealed against decisions made by HMRC in October 2014, the overall effect of which is to deny the appellants the benefit of various capital loss relief provisions in the Taxation of Chargeable Gains Act 1992 (“TCGA”) on the disposal by the appellant in 2004 of certain assets. It is not disputed that the assets were disposed of as part of the implementation of a plan designed by PricewaterhouseCoopers (“PwC”) to enable the property development and investment group of companies of which Development Securities Plc is a member (“DS Plc” and, as regards the group, “DSG”) to crystallise latent capital losses on the assets on the basis that indexation would in effect be comprised in the loss. It was essential to the success of the planning that the Jersey companies were resident in Jersey and not the UK in the period from incorporation until 20 July 2004. It is common ground that the only issue is whether the relevant Jersey companies were UK tax resident in the relevant period.
[2] DS Jersey (No. 1) Limited, DS Jersey (No. 2) Limited and DS Jersey (No. 3) Limited (respectively “DS1”, “DS2” and “DS3” and together the “Jersey companies”) were incorporated in Jersey on 10 June 2004 as subsidiaries of DS Plc. The companies were set up by Volaw Trust and Corporate Services Limited (“Volaw”), a Jersey company associated with the Jersey law firm, Voisin & Co. The initial shareholders were nominees provided by Volaw, who held the shares for DS Plc as the beneficial owner.
[3] The board of directors of each of the Jersey companies (the “board”) comprised three Jersey based and tax resident directors provided by Volaw: Mr Simon Perchard, Mr Trevor Norman and Mr Robert Christensen; and a UK based and tax resident director, Mr Stephen Lanes, who was the company secretary of DSG.
[4] The Jersey companies each held board meetings in Jersey on 11 June, 25 June, 12 July and 20 July 2004. In outline, in respect of each of the Jersey companies:
- At the first meeting the proposal was put to the board, as outlined by Mr Lanes, that DSG UK member companies would grant them call options which, if certain conditions were satisfied, would entitle DS1 to purchase shares in certain property owning companies (the L&R companies) and DS2 and DS3 respectively to purchase properties at Sheffield and Bexleyheath (the properties). It was envisaged that, if the directors decided to exercise the option, DS Plc may be willing to make a capital contribution to assist in the purchase of the relevant asset.
- On 25 June 2004 the board agreed to execute the call options having received a resolution from the nominee shareholders (issued on the instruction of DS Plc as beneficial owner) approving the transaction and notifying the board it was for the benefit of the companies and a letter of intent from DS Plc that it would consider making a capital contribution (although there was no contractual commitment to do...
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Commissioners for HM Revenue and Customs v Development Securities Plc and Others
...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. Background The taxpayers were Jersey incorporated companies established to undertake a tax planning scheme related to augmenting corporate capita......