Development Securities Plc and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 June 2019 |
| Neutral Citation | [2019] UKUT 169 (TCC) |
| Date | 05 June 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 169 (TCC)
The Honourable Mr Justice Marcus Smith, Judge Guy Brannan
Corporation tax – Whether certain companies were resident outside the United Kingdom – Residence outside the United Kingdom essential for tax planning – The test for residence.
The Upper Tribunal held that special purpose subsidiaries involved in a capital gains tax avoidance scheme were not UK-tax resident.
This appeal relates to a tax avoidance scheme designed to increase the value of a capital loss by an amount equivalent to the indexation allowance that would otherwise have been lost (because the allowance would have increased the value of a pre-indexation loss).
The tax avoidance nature of the scheme was not relevant to the outcome of the appeal and this was accepted by both parties. It is not necessary therefore to understand the full nature of the transactions carried out except to the extent that they involved:
- the creation of Jersey-incorporated special purpose subsidiaries (SPVs) of the principal appellant, Development Securities plc (DS);
- the acquisition by the SPVs, at an over-value equal to the indexation allowance that would otherwise be lost, of properties, and shares in property-owning subsidiaries, together the relevant assets; and
- the funding of this acquisition by way of a share subscription and capital contribution from DS;
It was essential to the operation of the scheme that the SPVs were tax resident in Jersey and not tax resident in the UK in the period from incorporation until a time after the acquisition by the SPVs of the properties and shares. The residence of the SPVs was then transferred to the UK.
The First-tier Tribunal (FTT) had previously found that the SPVs were UK-tax resident at all material times and that the scheme failed as a consequence. The Upper Tribunal, found that the FTT had erred in arriving at this judgment because it was insupportable, as a matter of law, on the FTT's findings of fact.
The original FTT judgment was, in essence, that the functions of the board of directors of each of the SPVs had effectively been usurped by DS acting in the UK and, consequently, that central management and control had been exercised by DS in the UK. The primary reason for this usurpation of functions was that the purchase of the relevant assets was undertaken at an overvalue and, as a consequence, was an uncommercial transaction. This, the FTT found, meant that the SPVs were simply following instructions from its UK-based parent company.
The Upper Tribunal disagreed. The transaction was not in fact uncommercial, because it was funded by a share subscription and capital contribution and overall net assets of the SPVs were not diminished. This undermined the fundamental basis of the FTT's decision.
The FTT had failed to correctly understand the nature of the director's duties under Jersey law. There were no employees or creditors of the SPVs, therefore the only other relevant stakeholder to which the directors owed a duty was the parent company. It was appropriate therefore to fully consider and implement the wishes of the parent company, subject only to determining whether the transactions were not otherwise illegal or in breach of the directors' duties. In this regard, it was clear on the facts that, in approving the transactions, the Jersey-based directors, who constituted a majority, had fully considered the nature and legality of the arrangement and that they had determined there was no breach of directors' duties.
In this corporation tax residence case, the Upper Tribunal found that the functions of the board of directors of Jersey incorporated special purpose vehicles were not effectively usurped by the actions and decisions of the parent company in the UK. The SPVs were not UK-tax resident and the FTT had erred in law in finding otherwise.
The case demonstrates the importance of determining, under local company law requirements, the precise nature of the duties and obligations of the directors' of any purported non-UK tax resident company. In the absence of any employee or creditor stakeholders of the company, the authorisation of an otherwise uncommercial transaction (viewed in isolation) may not necessarily give rise to an usurpation of the board's powers provided there has been no breach of directors' duties and obligations.
Sam Grodzinski, QC and Julian Hickey, instructed by Levy & Levy, appeared for the appellants
Akash Nawbatt, QC and Kate Balmer, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
[1] In October 2014, the Respondents to this appeal, the Commissioners for Her Majesty's Revenue and Customs (“HMRC”), denied the Appellants the benefit of various capital loss relief provisions in the Taxation of Chargeable Gains Act 1992 (“TCGA”) on the disposal by the Appellants in 2004 of certain assets, which we refer to as the “relevant assets”.
[2] The relevant assets were disposed of pursuant to a plan, designed by PricewaterhouseCoopers (“PwC”), intended to enable the Appellants to crystallise latent capital losses on the relevant assets on the basis that indexation would be comprised in the loss. We shall refer to this plan as the “Scheme” and describe it in greater detail below.1
[3] The Fifth, Sixth and Seventh Appellants – respectively, “DS1”, “DS2” and “DS3”, together the “Jersey Companies” – were incorporated in Jersey for the purposes of the Scheme. The Jersey Companies were incorporated as subsidiaries of the First Appellant, Development Securities plc. Development Securities plc is part of a property development and investment group of companies (the “Development Securities Group” or “DSG”). The relevant assets were assets held by DSG companies incorporated and resident in the United Kingdom. The intention was that the relevant assets would be acquired by the Jersey Companies pursuant to the Scheme.
[4] It was essential to the operation of the Scheme that the Jersey Companies not only be incorporated in Jersey, but resident there (and not resident in the United Kingdom) for corporation tax purposes from the date of their incorporation until 20 July 2004.
[5] HMRC determined that the Appellants could not benefit from the capital loss relief provisions in the TCGA because the Jersey Companies were in fact resident in the United Kingdom for tax purposes in June and July 2004. For that reason, the intended tax advantages of the Scheme failed.
[6] The Appellants appealed HMRC's decision to the First-tier Tribunal (Tax Chamber) (the “FTT”). In a decision dated 14 July 2017 (the “Decision”), the FTT decided that the Jersey Companies were tax resident in the United Kingdom at the material times. The Appellants' appeal was, therefore, dismissed. With the permission of the FTT, given on 16 November 2017, the Appellants appeal to this tribunal.
[7] Appeals to this tribunal are on points of law only. Both the Appellants and HMRC accepted that the question of a corporation's residence is essentially a question of fact. The Appellants made clear that they were not challenging any of the FTT's findings of primary fact: they accepted that they had no right to do so. Rather, the Appellants contended that the FTT had either applied the wrong test to the facts as found by it or – if the FTT had applied the right test – it had come to a conclusion which could not properly be reached on a proper application of that test and so the FTT's decision was wrong in law on the principles laid down in Edwards (HMIT) v Bairstow.2
[8] The only issue before the FTT and now before this tribunal is whether the Jersey Companies were resident in the United Kingdom, in particular during the period from their incorporation in Jersey on 10 June 2004 until the companies moved their residence to the United Kingdom on 20 July 2004 and thus from that date onwards (as is common ground) were resident in the United Kingdom.
[9] The Scheme was, as the Appellants candidly admitted, a tax planning or tax avoidance scheme. HMRC originally suggested that the transactions in question were ineffective for tax purposes according to the principles in WT Ramsay Ltd v IR Commrs3 and Furniss (HMIT) v Dawson.4 That argument was abandoned by HMRC in September 2014. Accordingly, the fact that the Jersey Companies were incorporated in Jersey and required Jersey residence for the purposes of a tax avoidance scheme is irrelevant to our consideration of the question of the residence of the Jersey Companies and we leave it out of account. As Lord Neuberger stated in R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd):5
… one must be careful before stigmatising the contractual documentation as being “artificial”, bearing in mind that EU law, like English law, treats parties as free to arrange or structure their relationship so as to maximise its commercial attraction, including the incidence of taxation …
[10] The test of a corporation's residence involves a classic “multi-factorial” approach, where we should be slow to interfere unless the FTT has erred in principle. In R & C Commrs v Arkeley Ltd (in liquidation), the Upper Tribunal stated the approach in this way:6
Where a decision involves the application of a not altogether precise legal standard to a combination of features of varying importance, that will fall within the class of case in which an appellate court should not reverse the lower tribunal's decision unless it has erred in principle …
That is the approach we follow in this case.
[11] This decision considers the following matters in the following order:
- The test for determining where a corporation is resident. The test for the residence of a corporation is one that has evolved at common law, beginning with the decision of the House of Lords in De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes).77(1906) 5 TC 198. The test is considered in Section B below. Section B...
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