On 14 July 2017, the First-tier Tribunal4 held that a number of Jersey-incorporated companies established to hold UK property were, in fact, UK tax resident as a result of the central management and control of the companies taking place in the UK.
A group headed by a UK resident parent undertook a tax-planning proposal designed, and carefully implemented, by its accountants. The aim of the proposal was to allow the group to access latent capital losses on certain assets (including UK real estate) on the basis that the crystallised losses would include indexation. Very broadly, the proposal involved newlyestablished wholly-owned Jersey companies purchasing the assets at an artificially high price and selling them shortly afterwards at a loss. Critical to the success of the proposal was that the Jersey companies would be treated as non-UK resident prior to sale of the assets.
The Tribunal, in a lengthy judgment, agreed with HMRC that the tax planning scheme did not work as the Jersey companies were UK tax resident throughout.
The facts of the case were considered by the Tribunal at some length, and this serves as a helpful reminder as to the importance of contemporaneous records in circumstances were the tax residence of a non-UK company is questioned. The Tribunal looked at emails, board minutes and hand-written notes in determining who exercised central management and control of the Jersey companies (and where).
After concluding its review of the relevant facts, the Tribunal then considered the relevant case law including Bullock v Unit Construction, Wood v Holden and Laerstate. Stressing the “unusual features” in this case, primarily being the fact that the only transactions that fell to be undertaken by the Jersey companies whilst they were (supposedly) Jersey resident were those of acquiring the assets at substantially more than their then market value, the Tribunal held that the “real business” of the companies was to undertake the parent’s tax planning proposal. In the words of the Tribunal, these transactions were “inherently uncommercial” from the Jersey companies’ perspective.
The result, according to the Tribunal, was that the only strategic decisions taken by the Jersey companies’ boards were those to implement the parent’s plans. In doing so, they were acting on what was in effect an instruction from the parent company. The Tribunal drew an “essential distinction” between this case and the facts in Wood v Holden (an otherwise apparently similar case in some respects) in that unlike in Wood v Holden the Jersey board in this case were presented with a sole transaction which had no commercial merit for the companies themselves. Accordingly the “inescapable conclusion” was that “the board was simply doing what the parent… wanted it to do and in effect instructed it to do. In the circumstances, the line was crossed from the parent influencing and giving strategic or policy direction to the parent giving an instruction.”
Although this decision (which may well be appealed) may at first glance cause concern to those involved in the not uncommon use of offshore vehicles to hold UK commercial property, it is important to keep in mind the unusual facts of this case. Central to the Tribunal’s decision in this case was the fact that, purely from the Jersey companies’ perspective, the transactions that fell within the scope of strategic decision-making made no commercial sense unless required at the instruction of the UK parent.
The decision can be viewed here.