Court of Appeal rules against the taxpayer in company tax residence dispute

Under UK law, a company is “resident” in the UK for corporation tax purposes if it is either incorporated in the UK or “centrally managed and controlled” in the UK, the latter point being a question of fact.

The Court of Appeal yesterday released its decision in Revenue & Customs v Development Securities plc and others [2020] EWCA Civ 1705, which concerns the question of when a non-UK incorporated company is centrally managed and controlled from the UK such that it becomes UK tax resident.  It represents a victory for HMRC, but the scope of the judgment is limited.

The decision allows HMRC’s appeal and affirms the decision of the First-tier Tribunal (FTT). The FTT decision was that the board of directors of a number of Jersey incorporated companies did not exercise central management and control, but had instead followed the instructions of the UK parent company. 

The transactions entered into by the Jersey companies (which involved the acquisition of assets at an overvalue) were part of a wider tax planning arrangement and the FTT found from the evidence presented that the directors in Jersey were in reality agreeing to implement transactions on the instruction of the parent company (based in the UK). The finding of fact was that the directors in Jersey had not acted improperly, but had not engaged with the substantive decision (which involved a transaction that was uncommercial from the perspective of the Jersey companies). That was insufficient for the directors be exercising central management and control from Jersey.

The Upper Tribunal determined that the FTT had erred in law and was not entitled to reach the conclusion it did on the basis of the facts found by the FTT, because the directors had applied their minds to the transaction and did not abdicate their decision making responsibilities.

The Court of Appeal considered that the Upper Tribunal had mischaracterised the basis of the FTT decision and therefore allowed the appeal. However, there was no Respondent’s notice seeking to uphold the Upper Tribunal’s decision on an alternative basis and so the usefulness of the decision in assessing the question of residence is limited. There appeared to be a disagreement between the judges on the substantive issues considered by the FTT. Nugee LJ expressed “very considerable reservations about the FTT’s reasoning”, while Richards LJ did “not have any concerns about the decision of the FTT or their reasons” and Newey LJ declined to express a view on the point.

The decision illustrates the difficulties that can arise in considering where a company is resident for tax purposes, but unfortunately offers little clarity as to how the Tribunal should approach this question if a case came before it with similar facts. Nugee LJ  referred to the observation of Mr Grodzinski (acting for the taxpayer) “…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 CMC.” This shows that there may be a high bar in future to establish that central management and control is exercised outside the UK.

This article was written by Helen Coward. For more information, please contact Helen on +44 (0)20 7427 6766 or at helen.coward@crsblaw.com.