In the recent case HMRC v Development Securities PLC and Others, the Court of Appeal (CA) agreed with the First Tribunal’s (FTT) decision (and overturned the Upper Tribunal’s (UTT) decision) by holding that a set of Jersey incorporated companies were centrally managed and controlled in the UK (and thus UK corporate tax resident).
Whilst the decision does not establish any new law and the CA’s judgment was limited, it nonetheless highlights the very fact-specific nature of the central management and control test, and the importance of making and properly recording substantive decisions in the desired jurisdiction of tax residence. Despite local board minutes taking place and being recorded, the case highlights: (i) problems with careless terminology in the minutes, (ii) how a UK parent can be regarded as having too much influence over an offshore subsidiary, and (iii) the importance of offshore directors “actively engaging” with the decision-making process.
In summary, companies were incorporated in Jersey in 2004 to acquire assets at an overvalue. The tax driven goal was to crystallise the latent capital losses without losing the benefit of indexation allowance. The Jersey companies were funded by capital-contributions from their UK parent. For the arrangement to achieve the desired tax treatment, it was essential that the subsidiaries be Jersey tax resident when the call options were exercised.
Advice was taken and all board meetings were held in Jersey with mostly Jersey resident directors. After the acquisitions, the Jersey directors were replaced by UK directors, then making the companies UK resident.
The First Tribunal
The FTT found that whilst the meetings concerning the acquisitions took place in Jersey with a Jersey-based board, they had merely passed the formal resolution on instruction from the UK parent company without actually engaging with the “substantive decision”. Therefore, at the material time the companies were UK tax resident.
The Upper Tribunal
The UTT reversed this decision, and interpreted (incorrectly, as the CA would later decide) that the FTT’s primary reason for its conclusion was that the directors had abdicated responsibility as they knew that the transactions were contrary to the companies’ commercial interests. The UTT construed the FTT’s conclusion as being based on a breach of the director’s duties. The UTT held that the Jersey directors had properly considered the decisions they made on behalf of the companies and thus a result, “central management and control” had been exercised in Jersey.
The Court of Appeal
The CA held that the UTT had misunderstood the basis of the FTT’s decision and factual findings. In particular, the FTT did not reach its conclusion on the basis that the directors entered into the acquisitions “mindlessly” but that rather they did not engage with the “substantive decision” itself, which the FTT considered was ultimately made by the UK parent.
The CA overturned the UTT’s reversal thus restoring the FTT’s decision. The CA’s decision was limited to confirming that the UTT’s reasons for overturning the earlier decision were incorrect. The CA did not itself delve into the issue of central management and control. In fact, Nugee LJ in his judgment doubted the Frist Tribunal’s reasoning and referred to the observation by Sam Grodzinski QC (acting for the taxpayer) that “the FTT’s decision was the first time in any case where the local board of directors of a company had actually met, had understood what they were being asked to do, had understood why they were being asked to do it, had decided it was lawful, had reviewed for itself the transactional documents, had been found not to have acted mindlessly, but had nevertheless been found not to have exercised [Central Management and Control].”
It is important for offshore company services providers to be provided with sufficient information in order to understand the wider groups and interests of the companies they administer, especially when acting as professional directors. Where the tax residence of the company is paramount (such as it was here), the directors should not be afraid to ask questions or seek advice prior to entering into a resolution. The advice should be referred to in the board minutes but how it is referred to requires special attention in order to satisfy the central management and control test. At Winckworth Sherwood, our corporate, tax and private client lawyers have significant experience in advising offshore clients/service providers on the drafting of board documentation, and the recording of the commercial and tax rationales of decisions.