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HMRC v Development Securities PLC and Others - Court of Appeal decision

HMRC v Development Securities PLC and Others - Court of

The Court of Appeal has restored the First-tier Tribunal’s decision that certain Jersey incorporated subsidiaries of a UK group were UK tax resident.

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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 Court of Appeal (CA) has overturned the decision of the Upper Tribunal (UT) and restored the decision of the First-tier Tribunal (FTT) that the Jersey-incorporated companies were centrally managed and controlled (and therefore tax resident) in the UK at the material times.

The case concerned arrangements implemented in 2004 that were intended to crystallise latent capital losses without losing the benefit of indexation allowance.

The arrangements involved Jersey-incorporated companies acquiring assets for a price exceeding their market value (funded by capital contributions from the group’s UK parent).

For the arrangements to achieve the expected tax treatment, the Jersey-incorporated companies needed to be tax resident in Jersey when they acquired the assets.

HMRC contended that the companies were instead resident in the UK at this time.

As previously reported, the FTT held in favour of HMRC, but the UT overturned that decision and held in favour of the taxpayer.

Court of Appeal decision

In its decision, the CA has overturned the decision of the UT, and restored the decision of the FTT in favour of HMRC; all three judges considered that the reasons the UT gave for overturning the FTT’s decision were flawed.

The error which it was considered that the UT had made was that it misinterpreted the primary reason for the FTT's decision as being that the directors knew that the transactions were contrary to the companies’ commercial interests. The true basis for the FTT's decision was that the directors were acting based on what they perceived to be an ’instruction’ from the group’s UK parent company to enter into the proposed transactions, without ’actively engaging’ in a substantive decision.

Consequences of the CA decision

Strictly, the CA’s decision is limited to holding that the UT’s reasons for overturning the FTT’s decision were incorrect. This does not mean that the CA necessarily agreed with the FTT’s decision – one judge did, one judge had ’considerable reservations’, and the leading judgment, although very detailed and apparently approving, did not expressly say.

Given the lack of agreement in reasoning between the various judgments, the importance of central management and control in determining the extent of the UK’s taxing rights, and the fact that the Supreme Court has not considered central management and control, it seems realistic that should the taxpayer seek permission to appeal, it would be granted.

Central management and control is a factual test, and, on one level, the CA’s decision does nothing more than restore an FTT decision on a finding of fact that is particular to that taxpayer. However, where an offshore special purpose vehicle (SPV) controlled by a UK parent is involved in a transaction to assist with achieving a particular tax outcome, questions such as whether it is possible for that SPV to be a non-UK tax resident, and if so, whether it is right that directors must ‘actively engage’ with decision-making, and what that actually means in practice, are all difficult questions.

Regardless of whether the Supreme Court considers this case, the residence is likely to remain an area of HMRC inquiry, and taxpayers should continue to focus on board quality and record-keeping.

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