Geoffrey Richard Haworth v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Sir Timothy Lloyd,Lord Justice Gross |
| Judgment Date | 01 May 2019 |
| Neutral Citation | [2019] EWCA Civ 747 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C1/2018/1385 |
| Date | 01 May 2019 |
The Queen on the application of
[2019] EWCA Civ 747
Lord Justice Gross
Lord Justice Newey
and
Sir Timothy Lloyd
Case No: C1/2018/1385
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Sir Ross Cranston
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Giles Goodfellow QC and Mr Ben Elliott (instructed by Levy & Levy) for the Appellant
Mr Timothy Brennan QC and Mr Christopher Stone (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing dates: 2–3 April 2019
Approved Judgment
“Follower” and “accelerated payment” notices were introduced by the Finance Act 2014 (“ FA 2014”) with a view to addressing tax avoidance. A follower notice renders the recipient liable to a penalty if he does not take steps to counteract or surrender a tax advantage. An accelerated payment notice requires up-front payment of disputed tax.
This case concerns the validity of follower and accelerated payment notices which the respondents, HM Revenue and Customs (“HMRC”), gave to the appellant, Mr Geoffrey Haworth, in June 2016. Sir Ross Cranston dismissed a claim for judicial review of the notices, but Mr Haworth appeals against that decision.
Basic facts
At the beginning of 2000, a trust established by Mr Haworth for the benefit of himself and his family held shares in a company called TeleWare plc. A plan developed to merge TeleWare plc with another company, Workplace Systems Group Limited, and to list shares in the new company, in the event TeleWork Group plc (“TeleWork”), on the London Stock Exchange. Mr Haworth was advised that gains arising on the disposal of shares held by the trusts could avoid capital gains tax if the existing Jersey trustees resigned in favour of trustees resident in Mauritius, where there was no capital gains tax. In April 2000, Mr Haworth's tax adviser, Mr Christopher Maslen, reported to Pinsent Curtis, solicitors:
“Counsel has suggested that trustees could be appointed resident in a jurisdiction which has a suitable double taxation treaty with the UK. This would be followed by a disposal. UK resident trustees would be appointed before the end of the tax year in which the disposal takes place. The gains arising in the hands of the intermediate trustees could escape taxation.”
On 1 June 2000, Mr Maslen wrote to Mr Chandra Gujadhur of Deloitte & Touche Offshore Services Limited explaining that Mauritius trustees might be able to meet his client's tax planning needs. After the trustees were appointed, Mr Maslen said, they would be asked to undertake “various steps”, including “the disposal of some trust shareholdings” and “the onward appointment of UK trustees, probably at the end of October 2000”.
On 26 June 2000, the Jersey trustees formally retired in favour of Mr Gujadhur and Deloitte & Touche Offshore Services Limited. The trust became registered in Mauritius.
The group restructuring took place in early July 2000, as a result of which the Mauritian trustees became shareholders in TeleWork. On 3 August, TeleWork was floated and all the shares that the trust held in the company were sold in the course of the flotation.
In October 2000, the Mauritian trustees retired and United Kingdom trustees were appointed.
On 8 July 2010, the Court of Appeal, by a majority, ruled in favour of HMRC in Smallwood v Revenue and Customs Commissioners [2010] EWCA Civ 778, [2010] STC 2045. In that case, as in the present one, relief was claimed under the UK/Mauritius double tax agreement. Mr Smallwood had established a trust for the benefit of himself and his family which had a Jersey trustee. To avoid capital gains tax on a sale of shares held by the trust, a scheme was devised pursuant to which a Mauritian company became the trustee in December 2000, the shares were sold in January 2001 and Mr Smallwood and his wife, who were both resident in the United Kingdom, replaced the Mauritian trustee in March 2001.
Article 13(4) of the UK/Mauritius double taxation agreement provided for capital gains to be taxable “only in the Contracting State of which the alienor is a resident”. It was argued by the Smallwoods that article 13(4) had to be read as fixing the date of disposal as the reference point for the determination of residence, but the Court of Appeal was unanimous in rejecting that submission and in concluding that article 4(3) of the double taxation agreement, under which the residence of a corporate entity resident in both Contracting States was deemed to be “the Contracting State in which its place of effective management is situated”, had to be applied in relation to the period “up to and including the sale of the shares during which [the Mauritian trustee] remained the trustee” (see paragraph 47). There was unanimity, too, that the “place of effective management” (or “POEM”) should be decided on the basis of the following passage from a commentary on article 4(3) of the OECD Model Convention on the double taxation of income and capital:
“As a result of these considerations, the ‘place of effective management’ has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.”
Patten LJ noted in paragraph 49 of his judgment that counsel for Mr and Mrs Smallwood “accepts that this is the test to be applied and that what has to be identified is the place where the real top-level management of the trustee qua trustee occurred rather than the day to day administration of the trust”.
Where the members of the Court of Appeal parted company was on the application of the test. In this respect, Hughes LJ, with whom Ward LJ agreed, differed from Patten LJ. Hughes LJ said this:
“[66] On the issue of POEM, with suitable hesitation, I respectfully differ from Patten LJ.
[67] The Special Commissioners' conclusion on the issue of POEM was one of fact. The taxpayers can succeed on their cross-appeal only if the Special Commissioners reached a conclusion of fact which was simply not available to them, and thus made an error of law: Edwards (Inspector of Taxes) v Bairstow (1955) 36 TC 207, [1956] AC 14.
[68] If the question were the POEM of the particular trust company trustee for the time being at the moment of disposal, namely PMIL, then it may be that the reasoning in Wood v Holden (Inspector of Taxes) [2006] STC 443, [2006] 1 WLR 1393 would justify the conclusion that the commissioners fell into this kind of error. I agree that their findings do not go so far as findings that the functions of PMIL were wholly usurped, and I agree that Wood v Holden reminds us that special vehicle companies (or, no doubt, special vehicle boards of trustees) which undertake very limited activities are not necessarily shorn of independent existence; indeed they would be ineffective for the purpose devised if they were.
[69] But it seems to me that to apply this reasoning to the present case is to ask the wrong question, and indeed to return to the rejected snapshot approach. The taxpayers with whom we are concerned under s 77 are the trustees. Trustees are, by s 69(1) TCGA 1992 [i.e. the Taxation of Chargeable Gains Act 1992], treated as a continuing body:
‘In relation to settled property, the trustees of the settlement shall for the purposes of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the trustees), and that body shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom.’
The POEM with which this case is concerned is, as it seems to me, the POEM of the trust, ie of the trustees as a continuing body. That is the question which the Special Commissioners addressed: see their paras 140 and 145.
[70] On the primary facts which the Special Commissioners found at paras 136–145, which are set out in the judgment of Patten LJ, I do not think that it is possible to say that they were not entitled to find that the POEM of the trust was in the United Kingdom in the fiscal year in question. The scheme was devised in the United Kingdom by Mr Smallwood on the advice of KPMG Bristol. The steps taken in the scheme were carefully orchestrated throughout from the United Kingdom, both by KPMG and by Quilter. And it was integral to the scheme that the trust should be exported to Mauritius for a brief temporary period only and then be returned, within the fiscal year, to the United Kingdom, which occurred. Mr Smallwood remained throughout in the UK. There was a scheme of management of this trust which went above and beyond the day to day management exercised by the trustees for the time being, and the control of it was located in the United Kingdom.”
HMRC's position is that Smallwood and the present case are both examples of...
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