HM Revenue and Customs v Smallwood and Another
| Jurisdiction | England & Wales |
| Judgment Date | 24 January 2008 |
| Date | 24 January 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr AN Brice, Dr JF Avery Jones CBE
Kevin Prosser QC with Elizabeth Wilson, Counsel, instructed by KPMG Bristol for the Appellants
Timothy Brennan QC, with Akash Nawbatt, Counsel, instructed by the Solicitor of HM Revenue and Customs, for the Respondents
Capital gains tax - tax planning scheme - double taxation relief - trust assets included shares realising gain on disposal - UK settlor having power to appoint new trustees - new trustees in Mauritius appointed after which shares sold - new UK trustees appointed in same tax year - whether trustees entitled to double taxation relief - whether trustees resident in Mauritius and UK - whether place of effective management of trust Mauritius or UK - appeal dismissed -Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 7TCGA 1992, s. 77(7) - Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 (SI 1981/1121).
The special commissioners decided that a corporate trustee was not resident solely in Mauritius for the purpose of the UK-Mauritius double tax treaty when a gain was made on the sale of shares held in a trust, but if it had been, art. 13(4) of the treaty would have prevented the UK from taxing the gain. In the circumstances the place of effective management of the trust under art. 4(3) was in the UK and the treaty did not prevent the UK from taxing the gain.
The settlor had settled property on trust for the benefit of himself and his family. A corporate trustee resident in Mauritius had been appointed. In January 2001 the trustee sold shares giving rise to chargeable gains. New UK trustees were then appointed in the same tax year. The provisions of the Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 77s. 77 potentially applied because the trustees were resident in the UK for part of the year within the meaning of Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 7s. 77(7). Conversely Taxation of Chargeable Gains Act 1992 section 86s. 86, which attributed gains of non-resident settlements to beneficiaries, did not apply if the trustees were UK resident for any part of the year. The trustees argued that the treaty prevented the UK from taxing the gains. They claimed double taxation relief because, at the dates of the disposals, the trust was resident in Mauritius.
The trustees appealed against a closure notice issued by Revenue and Customs which amended the trust's tax return for the year ending on 5 April 2001 to include the full amount of the gains arising on the disposal of the shares, and disallowing the claim for double taxation relief. The closure notice stated that, under the provisions of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 1s. 77(1), the trustees were not chargeable on those gains and so the amendment would not result in any amendment to the tax payable by the trustees for the year ending on 5 April 2001. The settlor appealed against a closure notice issued by the Revenue on 31 January 2005, amending his return so as to show the chargeable gains and tax due. There was a parallel appeal by the settlor because any gains would be chargeable on him under Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 1s. 77(1)(c) if the trustees' argument did not succeed.
Whether the corporate trustee was resident for the purpose of the treaty solely in Mauritius when the gains were made and, if so, whether art. 13(4) of the treaty prevented the UK from taxing the gains; and, if the trustee was resident in both the UK and Mauritius when the gains were made, whether the place of effective management of the trust under art. 4(3) of the treaty was Mauritius or the UK.
The special commissioners (Dr AN Brice and Dr John Avery Jones) (dismissing the appeals) said that, so far as the interpretation of art. 13(4) was concerned, art. 13 in general dealt with a conflict between taxation on the basis of source and on the basis of residence. Articles 13(1)-(3) depended on source; but art. 13(4) was more general and did not contain any reference to source. It stated that if the alienator was treaty-resident in one state the gains were taxable only in that state. If the state other than that of treaty residence taxed by its domestic law on any basis other than treaty residence, the treaty would prevent it. There would be no scope for any basis of taxation in the non-treaty residence state to continue. The plain words "taxable only" in the treaty residence state meant what they said.
English law drew a distinction between residence and chargeability, so that if a person was resident for part of the year he was chargeable for the whole year. In contrast, the treaty equated the two by defining residence in terms of liability to tax. So long as the liability to tax was by reason of one of the listed items, the relevant one being residence (in this context the act of residing), then there was no distinction between treaty residence and liability to tax. The words "by reason of … residence" did not mean solely past or current residence. If residing in a subsequent period caused residence for the whole year, then liability was by reason of residence, meaning residing. If hindsight could not be used to determine residence or liability to tax, it would matter in what order a person spent the requisite time in a state in order to become resident.
Chargeability to tax under domestic law for the whole tax year resulted in treaty residence throughout the tax year regardless of whether that chargeability was caused by residing in a later part of the tax year. Accordingly the trust had not been solely resident in Mauritius. That meant that, during the Mauritius residence period, there was dual residence that had to be solved by the tie-breaker in art. 4(3). The issue was as to the meaning of "place of effective management" ("POEM"). The result of the decision on the interpretation of art. 13(4) meant that if Mauritius won, the UK could not tax the gains; and if the UK won it could.
Having regard to the ordinary meaning of the words in their context and in the light of their object and purpose, the issue of POEM depended on where the real top-level management (or the realistic, positive management) of the trustee, as trustee, was to be found. The POEM was where the key management and commercial decisions that were necessary for the conduct of the entity's business were in substance made, which would normally be where the most senior persons, such as the board of directors, made their decisions. The directors could not be regarded as a rubberstamp or puppet if they applied their minds to the decision-making process (Wood v Holden (HMIT)TAX[2006] BTC 208 considered).
On the evidence, the trust's "place of effective management" was in the UK and the gain arising on the disposal of the shares was taxable in the UK.
1. In 1989 Mr Trevor Smallwood (Mr Smallwood) settled property on trust for the benefit of himself and his family. Mr Smallwood and his wife, Mrs Mary Caroline Smallwood, (the Trustees) are the present trustees of the Trevor Smallwood Trust (the Trust). On 10 January 2001 the then trustees sold shares in FirstGroup plc (FirstGroup) giving rise to chargeable gains. On 26 January 2001 the then trustees sold shares in Billiton plc (Billiton) giving rise to chargeable gains. The Trustees claimed that they were entitled to double taxation relief because, at the dates of the disposals, the Trust was resident in Mauritius.
2. The Trustees appeal against a closure notice issued by the Commissioners of Her Majesty's Revenue and Customs (the Revenue) on 31 January 2005. The closure notice amended the Trust's tax return for the year ending on 5 April 2001 to include the full amount of a gain of £6,801,011 arising on the disposal of shares in FirstGroup, and of a gain of £17,378 arising on the disposal of shares in Billiton, and disallowed the claim for double taxation relief. The closure notice stated that, under the provisions of Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 1section 77(1) of the Taxation of Chargeable Gains Act 1992 (the 1992 Act), the Trustees were not chargeable on these gains and so the amendment would not result in any amendment to the tax payable by the Trustees for the year ending on 5 April 2001.
3. Mr Smallwood, as settlor, appeals against a closure notice issued by the Revenue on 31 January 2005. The closure notice amended Mr Smallwood's return so as to show an amount of £6,818,390 as chargeable gains and tax of £2,727,356 as due.
4. We consider the legislation in detail later but a short summary is given here. Taxation of Chargeable Gains Act 1992 section 77 subsec-or-para 1Section 77(1) of the 1992 Act provides that, if a chargeable gain accrues to the trustees of a settlement from the disposal of settled property, and if the settlor has an interest in the settlement, the trustees are not chargeable to tax but the gains are treated as accruing to the settlor. As Mr Smallwood is also a beneficiary of the Trust he has an interest in it. Section 77(7) provides that the section does not apply unless the settlor is, and the trustees are, resident in the United Kingdom during any part of the year. Taxation of Chargeable Gains Act 1992 section 277Section 277 of the 1992 Act provides for relief from double taxation in relation to capital gains tax in cases where an Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the UK.
5. The Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 SI 1981 No. 1121 gives effect to the Convention set out in a Schedule to the Order (the Treaty). The Treaty is with the Government of Mauritius for the...
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