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Development Securities PLC and Others v HMRC – Upper Tribunal decision

Development Securities PLC and Others v HMRC

The case considered whether certain Jersey incorporated subsidiaries of a UK group were resident in the UK for corporation tax purposes.


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This case considered whether certain wholly owned Jersey incorporated subsidiaries of a UK property development and investment group were resident in the UK for corporation tax purposes. The Upper Tribunal (UT) has overturned the First-tier Tribunal’s (FTT’s) decision, finding in the taxpayer’s favour that the Jersey incorporated special purpose vehicles (SPVs) were centrally managed and controlled in Jersey at the material times and were not therefore UK tax resident.

The case considered the difficult issue of applying the central management and control (CMC) test to foreign incorporated SPVs set up as wholly owned subsidiaries by a UK incorporated and tax resident parent company.

The Jersey-incorporated companies in this case had entered into call option arrangements with UK group companies to crystallise latent capital losses without losing the benefit of indexation allowance. To be successful, the arrangement required the Jersey-incorporated companies to be tax resident in Jersey for a specific period. HMRC contended that the companies were instead resident in the UK during this period and denied the claims to indexation allowance.

As previously reported the FTT rejected the taxpayer’s appeal, finding that the transaction was not in the interests of the Jersey companies and therefore that the board was simply doing what the parent wanted it to do.

The UT has now overturned the FTT decision holding “the FTT’s primary basis for concluding that CMC was exercised in London and not in Jersey to be untenable and wrong given the facts found by the FTT in the Decision”. The UT held that the FTT’s conclusion rested on a fundamental misunderstanding of the nature of the transactions entered into by the Jersey companies and of the duties of the Jersey directors in relation to those transactions.

Commerciality of the transactions

The UT disagreed with the FTT’s conclusion that the relevant assets had been acquired by the Jersey companies on uncommercial terms, pointing out that those companies were not economically disadvantaged because, whilst the relevant assets were purchased at an overvalue, the overpayment was funded by a capital contribution from their sole shareholder (Development Securities plc).

Directors’ duties

The UT considered the duties of the directors of the Jersey companies under Jersey company law and found that as the Jersey companies had no employees and the transactions that the Jersey companies were to enter into did not prejudice creditors, the primary consideration would be whether the transaction was in the interest of the shareholders.

On examination of the findings of facts in the FTT, the UT concluded that it was clear the Jersey directors clearly understood their fiduciary duties and had exercised proper judgement in concluding that the transactions were in the best interests of the shareholders and therefore the best interests of the Jersey companies, as they did not prejudice either employees (there were none) or creditors of the Jersey companies.

The UT noted that the duration of the board meetings and the fact that the Jersey directors had sought clarification from the tax and legal advisors on the stamp duty treatment of the transactions and the option documentation served as positive evidence that they were not simply abdicating their responsibilities.

HMRC submitted a Respondents’ Notice seeking to defend the FTT Decision on other grounds. The UT rejected HMRC’s criticisms of the FTT’s findings of fact and also held that the FTT was correct to hold that the Smallwood case, which related to the residence of a trust, was inapplicable.

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