The UK Upper Tax Tribunal overturned, on 5 June 2019, a 2017 decision of the First-tier Tribunal (FTT) in deciding that three special purpose vehicles (SPVs) incorporated in Jersey as part of a tax planning arrangement were not managed and controlled in the UK.
In Development Securities plc & Others v HMRC [2019] UKUT 0169 (TCC), a property development and investment group undertook a tax avoidance scheme in 2004 designed to crystallise latent capital losses. Development Securities plc set up three SPV subsidiaries in Jersey, which were granted call options to acquire shares in property owning companies and certain properties.
The price payable by the Jersey SPVs on exercise of the call options was an amount equal to the historic base cost of the asset plus indexation accrued to that time. This was significantly in excess of current market value. The UK parent company funded the entire acquisition of the assets by subscribing for shares and making a capital contribution.
Within 40 days, the SPVs moved their residence to the UK to achieve an increased capital loss on disposal. In order to meet the accepted central management and control (CMC) test for tax residence, the boards of the Jersey SPVs had a majority of Jersey-resident directors and the board meetings all took place in Jersey and decisions were actually taken at those board meetings.
HMRC sought to challenge the scheme under Ramsay principles, but abandoned this argument in 2014. Instead it claimed that the scheme failed because the Jersey SPVs were effectively managed and controlled in the UK.
In 2017, the FTT agreed. In Development Securities (No.9) Limited & Others v HMRC [2017] UKFTT 0565 (TC), it concluded that the transactions entered into by the Jersey SPVs were inherently uncommercial and that the directors would not have accepted their appointment without an intention to undertake the transaction.
Under Jersey corporate law, the SPVs could only have entered into such transactions with the approval of their UK parent company. Further, the Jersey SPV directors only had one specific task entrusted to them by the UK parent company and following completion of that task they were to resign, which they did.
The FTT held that the directors appointed to the board were in reality, in accepting their appointment, agreeing to implement the parent’s decisions barring any legal impediment. While the SPV directors took every effort to ensure their actions were legal, there was no evidence that they took the commercial decision to implement the transactions or that they had considered the merits. Rather the UK parent company had taken this decision and the SPV directors were merely verifying that it could be implemented legally. As a result it found that the Jersey SPVs were centrally managed and controlled and resident in the UK and not in Jersey where the board meetings were held.
Development Securities appealed to the Upper Tax Tribunal, contending that the Jersey boards had not “abdicated responsibility for management and control” despite their purchase of the assets at an overvalue.
The Upper Tribunal noted that the Jersey subsidiaries had not been economically disadvantaged because the UK parent company had funded the overpayment. Further, the main concern of the directors of the Jersey subsidiaries should have been the best interests of the parent company as shareholder, and this was for the scheme to succeed.
The Upper Tribunal stated that in the case of SPVs, the CMC test should be approached with “particular care” so as to distinguish between influence over the subsidiary and control of the subsidiary. Where a parent merely influences a subsidiary, CMC remains with the subsidiary but where the parent company controls the subsidiary – by taking decisions that should properly be taken by the subsidiary’s board of directors – then CMC vests in the parent.
The Upper Tribunal did not consider that the fact that the directors had a specific task entrusted to them by their parent company was sufficient to establish where CMC vested. It was satisfied that the Jersey directors had not abdicated their responsibilities and had not ceded control to someone else, in circumstances where they:
- Knew exactly what they were being asked to decide;
- Did so understanding their duties; and
- Complied with those duties.
“Where a parent company merely influences the subsidiary, CMC remains with the board of the subsidiary. It is only where the parent company controls the subsidiary, i.e. by taking the decisions which should properly be taken by the subsidiary’s board of directors, that CMC vests in the parent,” said the Upper Tribunal. “The place of central management and control is the place where CMC is actually to be found, not the place where CMC ought to be exercised.”
This is a useful decision of the Upper Tribunal; it reconfirms that CMC is the place where business decisions are considered and actually made. It is often the case that a parent company will expect the board of a subsidiary to pass certain resolutions but, as long as the board directs its own mind to the matters under discussion, CMC will occur where the board passes those resolutions.
Although the decision of the Upper Tribunal is very much case-specific, the fact that the Jersey board questioned the documents placed before it and sought clarification on the external advice received was sufficient to evidence that the board were not abdicating their responsibilities or “rubber stamping” the transaction.
With the introduction across the Crown Dependencies and some of the Overseas Territories of new substance requirements, evidencing CMC continues to be very important; keeping detailed minutes of board meetings will assist any future enquiry into how a board meets its obligations and will also evidence good corporate governance.
For further information, please contact Stephen Hare, Managing Director of Sovereign Trust (Channel Islands), by phone on +44 (0) 1481 729 965 or by email.
