The UK's Upper Tribunal has decided that three special purpose vehicles (SPVs) incorporated in Jersey as part of a tax planning arrangement were not tax resident in the UK for tax purposes, overturning a 2017 decision from the First-tier Tax Tribunal.
Development Securities, a property and investment group based in the UK, created the subsidiaries in Jersey to gain tax advantages.The group had assets standing at a loss and decided to enter into a scheme designed by PwC to increase the capital losses.
Under this scheme, the SPVs holding the assets would grant call options to the Jersey companies at a significantly over-valued price.
The FTT decision cast some doubt on how the residence test should be applied in the very common case of a subsidiary company acting in accordance with its parent company's wishes"
For the scheme to work, the Jersey companies could not be considered UK-tax resident at the time the assets were acquired. Thus, the SPV directors held their board meetings in Jersey, so as to meet the accepted central management and control (CMC) test for tax residence.
However, the HMRC had a different view. It challenged the scheme, saying that the Jersey company directors were actually under the effective CMC of the parent company. The evidence for this was that they had agreed to buy the call options at far above their market price, which they would not have done if they were acting autonomously for the companies they directed.
The First-tier Tax Tribunal (FTT) agreed with HMRC's arguments and decided in 2017 that CMC resided in the UK on the basis that the directors in Jersey had a specific task entrusted to them by their parent following which they were to resign and because the scheme they were implementing would involve the Jersey companies acting in a manner that was contrary to their commercial interests.
"The FTT decision cast some doubt on how the residence test should be applied in the very common case of a subsidiary company acting in accordance with its parent company's wishes," said Jake Landman, a tax disputes expert at Pinsent Masons.
Development Securities appealed to the Upper Tax Tribunal, which has now reversed the lower tribunal's finding. It held that the Jersey company boards had not "abdicated responsibility for management and control" as the FTT had suggested, even though the scheme involved the SPVs purchasing assets at an overvalue.
The UK's Upper Tribunal judges confirmed "the mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent does not mean that central management and control vests in the parent."
The judges added that the directors of the Jersey SPVs had not "abdicated responsibility for management and control" as the FTT had suggested, simply because they had approved the purchasing of assets at an overvalue.
"Given HMRC's recent strong track record in avoidance cases, this is an unusually robust decision in favour of a taxpayer", said law firm Macfarlanes. "With corporate residence still a key area of focus for HMRC, we should expect to see a further appeal," it added.