In Development Securities plc & Others v HMRC [2020] EWCA Civ 1705, the Court of Appeal (CA) upheld the First Tier Tribunal's (FTT) decision that Jersey subsidiaries were UK resident due to the control exerted by the UK parent company.
The Development Securities group undertook a capital loss scheme in 2004, devised by PWC.
- Jersey subsidiaries were created in order to purchase existing group subsidiaries and properties whilst overseas resident.
- Subsequent steps allowed the crystallisation of Group losses at a level not achievable without the scheme.
- It was accepted that the scheme worked but only if the Jersey companies were not UK resident at the time of the initial purchase.
HMRC challenged the residency of the Jersey companies at the FTT and the challenge was upheld. The FTT found that the directors of the Jersey companies were not exercising Central Management and Control (CMC) but merely carrying out the instructions of the UK parent company.
Development Securities plc appealed and the Upper Tribunal (UT) overturned the FTT decision. The UT found that the FTT has misunderstood the nature of the transactions and had erred in law in finding the companies to be UK resident.
HMRC appealed to the CA, where Newey LJ summed up the case law on CMC, with particular reference to subsidiaries, as follows:
- The key principle to corporate residency is that a company resides where it conducts its real business. This is the place of actual management, not just where the management ought to take place.
- This applies just as much to subsidiaries and Special Purpose Vehicles (SPVs) (even where set up purely for playing a part in tax schemes).
- A company's residency can be other than of its incorporation not only where a constitutional body of the company exercises CMC elsewhere but also if the company's own functions are bypassed and CMC is exercised independently by another or if an outsider dictates decisions (but not just proposing/advising/influencing).
- A subsidiary will not have its residency taken as somewhere other than incorporation simply because it is following a tax planning scheme put forward by its parent company. It is also not an issue if the directors take decisions without full information or even if in breach of their director's duties.
- Residency is a question of fact.
In reviewing the decisions of the tribunals, the CA found:
- That the UT had misunderstood the FTT's basis for its conclusion. The UT stated that the FTT's decision was based on what it found to be the uncommercial nature of the transactions. This was not the case.
- In seeking to establish whether the directors had 'applied their minds' when making decisions, the FTT and the CA noted that there was no evidence that the Jersey directors had actively engaged with advisers to discuss the tax planning points of the scheme, whether from the company or group perspective.
- The CA highlighted the primary reason for the FTT decision as being that the Jersey directors were simply acting as instructed by the parent company and as such, CMC was exercised by the UK parent company, making the subsidiaries UK resident also.
The CA allowed HMRC's appeal.
Comment
It was noted by counsel for HMRC and the judges when hearing the appeal, that Development Securities plc had not issued a respondent's notice; a request for the court to uphold the previous decision for other reasons than those used by the lower court itself. This meant the CA could only review the case based on the UT's reasoning. This could have been an opportunity for Development Securities, as Nugee LJ (despite finding against the UT's reasoning) stated that his decision was not to be seen "as an endorsement by me of the FTT's reasoning". Nugee LJ went further and echoed the concerns of Development Securities' counsel that the FTT decision was a "significant departure from the previous case law".
Useful guides on this topic
Companies: residence and permanent establishments
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?
Groups: At a glance
What qualifies as a group for tax? How do you form a group? Which definition of a group applies for different types of tax? How does group relief work?
How to appeal an HMRC decision
What type of decision can you appeal? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?
External links
Development Securities plc & Others v HMRC [2020] EWCA Civ 1705