Haworth and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 February 2022 |
| Neutral Citation | [2022] UKFTT 34 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 34 (TC)
Judge Harriet Morgan
Mr Giles Goodfellow QC and Mr Ben Elliott, counsel, instructed by BDO, appeared for the appellant
Mr Timothy Brennan QC and Mr Christopher Stone, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
Capital gains tax – Application of the UK/Mauritius double taxation treaty to a plan to avoid capital gains tax on the sale of shares – Whether the trusts which sold the shares were resident in Mauritius at the relevant time – Consideration of the place of effective management test – On the facts, the trusts were resident in the UK – Whether the operation of the treaty is excluded on the basis that the two contracting states tax different persons – No – Appeals dismissed.
The FTT concluded that Mauritius trustees were acting on the directions of the settlors and their advisors in the UK so that under the DTT tie-breaker rules the trust was UK-resident and could not be protected by the treaty from UK tax on capital gains.
Geoffrey Haworth, Ian Lenagan and Kleinwort Benson Trustees Ltd (KBTL) appealed against amendments to their CGT self-assessments relating to the disposal by the trustees of two family trusts (one settled by Mr Haworth and one by Mr Lenagan, for the benefit of their respective families) of shares in TeleWork Group plc (TeleWork). The original trustees of each trust had been Jersey resident, but in June 2000, Mauritius trustees were appointed prior to the flotation of Telework (and disposal of shares by the trustees) in August 2000. In October 2000, the Mauritius trustees were replaced by KBTL and two UK-resident individuals and thus the trusts became UK-resident.
The appointment and retirement of the Mauritius trustees took place as part of a tax-planning scheme devised by Tax Counsel (the “round-the-world” scheme) and Mauritius had been chosen because of the particular terms of the UK/Mauritius tax treaty. The contention by the appellants was that the trustees were resident in Mauritius when the gain was realised and therefore (under the treaty) liable to tax on gains only in Mauritius (where no liability in fact arose) but also UK-resident in part of the tax year so that the settlor charge in TCGA 1992, s. 86 could not apply.
HMRC arguments were that:
- the capital gains article (art. 13(4)) did not apply to protect the gain because the person potentially liable to tax on the capital gain was not the same in the two jurisdictions (being the trustees in the UK as opposed to the trust in Mauritius);
- alternatively, if art 13(4) was in point, as the trusts were also resident in the UK during the tax year, the tie-breaker clause in the residence article of the treaty (art. 4(3) had to be applied. This required the place of effective management (POEM) of the trusts to be considered. In their view the appellants would have to demonstrate that the POEM of the trusts had been in Mauritius for the whole of the tax year. However, even if this were wrong, their view was that the POEM had been in the UK throughout, including the period that the Mauritius trustees were acting.
The Tribunal's conclusions were as follows:
HMRC's argument relied on drawing a distinction between the person liable to tax in the UK (the trustees, treated by TCGA 1992, s. 69 as a single continuing body) and in Mauritius (the trust, a deemed corporate person, the trustees being its agent). However, the Tribunal found that this was a distinction without any material difference. It was important not to be constrained by “technical rules of domestic law” as an international convention must be applied in a much wider context (IR Commrs v Commerzbank AG [1990] BTC 172).
As the Tribunal had concluded that the POEM was in the UK at all relevant times (see below), it was not necessary to consider whether the test had to be applied for the whole tax year or only (as the appellants suggested) when the disposal took place.
They concluded that the POEM had remained in the UK throughout the period that the Mauritius trustees were acting on the basis of the Court of Appeal's judgment in R & C Commrs v Smallwood [2010] BTC 637 (also a case concerning the round-the-world scheme and application of the UK/Mauritius tax treaty) that approved the Commissioners' approach of establishing where the “real top-level management” of the trust took place. In the current case, and based on the evidence before them, the Tribunal found that the “real top-level management” of the trusts was in the UK because the overall scheme for the sale of the shares (the round-the-world scheme) had been devised, decided upon, facilitated, orchestrated and superintended in the UK. The Mauritius trustees had taken on the appointment in the knowledge that they would be expected to implement the plan that was already in place and thus the decisions that they took to effect the individual actions necessary for implementation were merely day to day management or administration.
The Tribunal therefore agreed with HMRC's second argument that the protection of art. 13(4) (capital gains) of the UK/Mauritius treaty did not apply because the trusts were UK-resident under the tie-breaker clause of art. 4(3) (residence) and the appeal was dismissed.
This is an appeal that has taken over twenty years to be heard and (as can be seen from the 165 pages of the Tribunal's decision) turned on some very technical issues. However, even if it had succeeded on the technicalities, given the changing attitudes to this type of “loop-hole” planning over that period, it is perhaps unlikely that, in today's climate, a similar type of scheme would be successful.
[1] Mr Geoffrey Haworth, Mr Ian Lenagan and Kleinwort Benson Trustees Limited (“KBTL”) have appealed against amendments made by HMRC to their tax returns for the tax year 2000/2001. By the amendments HMRC seek to impose capital gains tax (“CGT”) on the appellants in respect of substantial capital gains (“the gains”) which arose on the disposals of shares in TeleWork Group Plc (“TeleWork”) made by the trustees of the following three trusts (together “the family trusts”):
- the Geoffrey Richard Haworth No. 2 Life Interest Settlement (the GH Trust), established by Mr Haworth; and
- The IFL 1991 Voluntary Settlement (the IFL Trust) and the IFL 1991 S&A Settlement (the S&A Trust), established by Mr Lenagan. I refer to Mr Haworth and Mr Lenagan as the settlors.
[2] The trustees of the family trusts realised the gains on selling shares in TeleWork on their admission to the Official List of the UK Listing Authority and to trading on the London Stock Exchange between 3 and 8 August 2000 (“the flotation”). TeleWork was created shortly before the flotation as the head of a group formed by bringing together under its ownership two companies in which the settlors and the family trusts then had an interest, WorkPlace Group Ltd (“Workplace”) and TeleWare plc (“TeleWare”) (“the merger”).
[3] The trustees of the family trusts at the time of the merger and flotation were (a) Deloitte & Touche Offshore Services Ltd (“DTOS”), and (b) Mr Chandra Gujadhur (together “the Mauritius trustees”), each of whom was resident in Mauritius. The Mauritius trustees were appointed in place of the previous Jersey resident trustees, with effect from (i) 26 June 2000, in the case of the GH trust, and (ii) 30 June 2000, in the case of the IFL Trust and the S&A Trust. On 24 October 2000, KBTL and two individuals (“the UK trustees”), each of whom was resident in the UK for tax purposes, were appointed as trustees of each of the family trusts in place of the Mauritius trustees. It was common ground that from 24 October 2000, the family trusts were resident in the UK for CGT purposes.
[4] The Mauritius trustees were put in place for this short period (from 26 or 30 June 2000 until 24 October 2000 (“the relevant period”)) and were replaced with the UK trustees solely to enable the appellants to avoid CGT in respect of the gains for which they would otherwise be liable. This planning is known as a “round the world” scheme and its use has been examined by the Court of Appeal in R & C Commrs v Smallwood [2010] BTC 637 (“Smallwood”). It was held by the majority in that case that the Special Commissioners (“the Commissioners”) had not erred in their decision (see (2008) Sp C 669) that the planning failed, and CGT was in fact due on the relevant sale of shares. At the heart of the dispute in this case is a disagreement on the scope and effect of that decision.
[5] In summary, Mauritius was chosen as the location for the family trusts' administration whilst the gains were realised because:
- The United Kingdom (UK) has in place with Mauritius a double taxation agreement (the Mauritius treaty) which contains a provision which the appellants consider applies to exempt the capital gains from CGT as a result of the steps taken under the planning (article 13(4)):Article 13(4) provides that:Capital gains from the alienation of any property other than that mentioned in paragraphs (1), (2) and (3) of this Article [which apply to certain property (such as immovable property) and not shares] shall be taxable only in the Contracting State of which the alienator is a resident. (Emphasis added.)The appellants' view is that (a) for the purposes of article 13(4), the family trusts, as the alienators of the shares on which the gains arose, were residents of Mauritius at the relevant time, and (b) accordingly, article 13(4) applies with the effect that the gains are taxable only in Mauritius and not in the UK.
- Whilst, in order to benefit from article 13(4), the intention was that the family trusts were residents of Mauritius (at least during the relevant period), a resident trust is not subject to any tax charge in Mauritius on capital gains arising...
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