On 5 June 2019, the Upper Tribunal (UT) held10 that a number of Jersey-incorporated companies were, in fact, resident for tax purposes in Jersey. This decision overturned the 2017 decision of the First-tier Tribunal (FTT), which held that the companies were UK tax resident as a result of the central management and control (CMC) of the companies being exercised in the UK (through the companies’ parent). The UT took the view that the FTT had incorrectly concluded that the Jersey company directors had abdicated their decision-making responsibility.
The facts of the case were that a group headed by a UK resident parent undertook a taxplanning 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 newly-established 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 FTT, 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 UT dismissed out of hand one of the reasons for the FTT’s decision. The first reason (in the UT’s view the “subsidiary” one) for the FTT’s decision was that the directors of the Jersey companies had a specific task entrusted to them by the UK parent, after which they were to resign. This specific task was to implement the tax planning scheme devised by the UK parent with the help of its accountants. This was considered by the UT to be wholly irrelevant to the question of CMC. Quoting the decision in Wood v Holden11, the UT held that “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”.
On the FTT’s “primary” reason for deciding that CMC of the companies was exercised in London, the UT considered the FTT to be “untenable and wrong”. The FTT had held that the Jersey company directors had abdicated responsibility for exercising CMC due to the fact that, from the outset, the Jersey directors knew that they were being asked to cause the companies to act in a manner contrary to their commercial interests. In other words (according to the FTT) the Jersey company directors were not exercising CMC as they were not exercising their judgment as directors. In the Upper Tribunal’s view, however, the FTT had reached this view on the back of a fundamental misunderstanding.
Firstly the FTT was incorrect (according to the UT) to say that the Jersey companies acquired the assets on uncommercial terms (ie at a price above market value). The purchases were funded by the parent, not the Jersey companies.
Secondly, as the Jersey companies had no employees and there was no question as to the transactions prejudicing creditors, in the UT’s view the primary duty of the Jersey company directors would be to their shareholders (ie the UK parent). Therefore, in acting as they did, the Jersey directors were not in breach of their duties. In the words of the UT:
“the essential error committed by the FTT was to focus on the uncommerciality of the transactions to the individual Jersey Companies without having regard to the actual duties the directors owed to those companies”.
The UT decision is of particular interest when looking at the CMC of SPVs. It makes a distinction between circumstances where the parent influences the SPV (so that CMC remains with the board of the SPV) and where the parent controls the SPV in such a way so that decisions that should, properly, be taken by the board of the SPV are in fact taken by the parent. Such parent “control” can be carried out in a number of ways, from usurping the SPV’s board functions to cases whereby the SPV board simply ‘rubber stamps’ decisions taken elsewhere. On the facts, in this case, the UT took the view that the actions of the Jersey company directors did not amount to an abdication of CMC; they were not merely “rubber stamping” decisions taken by their parent.