The Upper Tribunal (UT) confirmed that family trusts that had engaged in a tax planning arrangement known as the 'round the world' scheme were not based in Mauritius at the time of a disposal for Capital Gains Tax (CGT) purposes and the gains were properly taxable in the UK, the actual Place Of Effective Management (the 'POEM').
The first and second appellants (Mr Haworth and Mr Lenagan) were the settlors of separate family trusts that participated in the 'round the world' scheme. The trusts were originally resident in Jersey and had been established for many years. Mr Haworth's trust held shares in Teleware Plc whilst Mr Lenagan's trusts held shares in Workplace Systems Limited. There was a proposed merger of these two companies to form TeleWork Group Plc ahead of a flotation on the London Stock Exchange. If that proceeded the scheme was intended to operate by the following steps, all within 2000-01:
- The Jersey trustees would retire and be relaced by trustees resident in Mauritius.
- Shares would be sold by the Mauritian trustess as part of the flotation.
- The Mauritian trustees would retire and be replaced by English trustees.
By these steps the parties anticipated avoiding CGT on the disposal of shares in TeleWork Group Plc.
The effectiveness of the scheme turned on the family trusts having their place of effective management (the 'POEM') for the purpose of the double tax treaty in Mauritius at the time of the share sale.
- The FTT had considered the 2010 case of Smallwood: Offshore trust was managed in the UK. This case is also concerned with the round the world scheme. The FTT found that the POEM was in the UK and therefore the gains were taxable.
- The appeal was based on a single point. The appellants argued the FTT applied the wrong test in identifying the POEM of the trusts. It should have applied a test from the Court of Appeal case of Wood v Holden which was concerned with establishing central management and control (CMC) of a company ( see Companies: Permanent establishment & residence).
- One of the judges in Wood v Holden stated the test for identifying the location of the CMC was in substance the same test for identifying the POEM of a company.
- In Wood v Holden the same judge distinguished cases where CMC is exercised by a constitutional organ such as the board of directors from those where the functions of that constitutional organ have been usurped.
In its discussion of the appeal, the UT found that:
- In Wood v Holden the POEM was not a necessary part of the reasoning by which the Court of Appeal dismissed the case.
- In Smallwood the Special Commissioners (SpC) had found that the power of the Mauritian trustees had not been usurped but even so the realistic positive management of the trust remained in the UK. The Mauritian trustees had decided the date of disposal but had not decided if the shares should be sold. In its decision, the SpC had not rejected the approach of Wood v Holden.
- In Smallwood the Court of Appeal confirmed the SpC had applied the correct test. The approach in Wood v Holden was not open to the SpC on the facts because the decision-making functions of the Mauritian trustees had not been usurped.
The appeal was dismissed.
Note: The tax planning in the current case occurred in 2000-01. The relevant provisions in the legal framework which underpinned this scheme were subsequently amended to prevent tax avoidance by the round the world scheme.
Useful guides on this topic
Non-resident trusts
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?
Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?
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