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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on the Court of Appeal decision in Wood and another v Holden.

Context

Chargeable gains accruing to a company which is not UK resident but, if UK resident, would be a close company are under TCGA 1992 s13 apportioned to participators in the company who are resident or ordinarily resident in the UK and who, if an individual, is domiciled in the UK. Apportionment of the gain follows their interests in the company subject to a 10% de minimis provision. Subject to anti-avoidance provisions, a no gain - no loss rule operates under s171 for transactions within UK resident 75% groups.

Wood and another v Holden: the facts

Mr and Mrs Wood were settlors of a number of non-resident settlements set up as a part of what the Special Commissioners described as a ‘sophisticated scheme to avoid CGT’. The trustee of those settlements was the sole shareholder of a BVI registered company, CIL. In July 1996 CIL sold some shares to Eulalia, a Netherlands incorporated company and wholly-owned subsidiary of CIL. The scheme assumed that CIL and Eulalia were not merely incorporated outside the UK but were also resident outside the UK.

However, HMRC took the view that, while CIL was resident outside the UK, Eulalia was resident in the UK and made assessments on that basis. The gains made by CIL on the disposal of the shares were attributed to the trustee under TCGA 1992 s13. Mr and Mrs Wood were assessed to CGT in respect of those gains, which were treated as accruing to them under s86 (attribution of gains to settlors with interests in non-resident settlements).

The Special Commissioners (see CTR Issue 10 (Spring 2005) Item 23) found for HMRC, though the taxpayers’ appeal to the High Court was upheld (see CTR Issue 11 (Summer 2005) Item 3). Park J found that, on a proper application of the law to the facts, the only tenable conclusion for the Commissioners to have reached was that, under the common law of corporate residence applying the test of central management and control, Eulalia was resident in the Netherlands. He concluded that the Commissioners either had to have applied the wrong test or, if they had applied the right test, they had come to a conclusion which could not properly be reached in an application of it, so as to exhibit an error of law. Park J accordingly allowed the taxpayers’ appeal.

HMRC appealed against that decision. They contended that the Commissioners had directed themselves correctly in point of law, and the judge had not, therefore, been entitled to interfere with their decision.

The decision (CA): Chadwick, Moore-Bick LJJ and Sir Christopher Staughton

Park J had been correct to hold that the only conclusion open to the Special Commissioners, on the facts which they had found, was that Eulalia was resident in the Netherlands.

In seeking to determine where ‘central management and control’ of a company incorporated outside the UK lay, it was essential to recognise the distinction between (a) cases where management and control of the company was exercised through its own constitutional organs (the board of directors or the general meeting) and (b) cases where the functions of those constitutional organs were ‘usurped’, in the sense that management and control was exercised independently of, or without regard to, those constitutional organs. In cases which fell within the former class, it was essential to recognise the distinction (in concept, at least) between (a) the role of an ‘outsider’ in proposing, advising and influencing the decisions which the constitutional organs took in fulfilling their functions and (b) the role of an outsider who dictated the decisions which were to be taken.

The facts which necessarily led to the Commissioners’ conclusion included the finding that Eulalia’s directors had not been by-passed nor had they stood aside, since their representatives had signed or executed documents, and that the directors had accepted the agreement. Park J‘s decision to reverse the Commissioners’ findings as to the residence of Eulalia on the basis of the central management and control test was therefore upheld.

(Wood and another v Holden EWCA Civ 26 26.1.06 reported at [2006] STI Issue 4)

Comment

Does this CA decision in Wood v Holden impliedly the overturn the 2000 CA decision in Deverell? Deverell was not a tax case, but held that for purposes of constituting someone a shadow director, directions or instructions can include advice (other than professional advice which is excluded by ITEPA 2003 s67(2)). Note also the 2005 High Court decision in Ultraframe v Gary Fielding and others [2005] EWHC where the Court concluded that the individual must do something before the directors can be accustomed to act on his directions or instructions, so as to constitute him a shadow director (whether for Companies Acts or Taxes Act purposes).

More generally, might the provisions of TCGA 1992 s13 be vulnerable to the principle of freedom of movement under the EU Treaty?

I do not yet know whether this case will go to the House of Lords. While the CA decision will certainly give considerable comfort to the offshore industry, the whole issue of what needs to be done before a person can be a shadow director requires some resolution. Meanwhile, for example, in dealing with offshore structures involving the holding of residential property in the UK for occupation by a beneficiary, it may be safer to assume the worst and to adopt eg a loan structure, instead of having the house owned directly by an offshore company.

Matthew Hutton MA, CTA (fellow), AIIT, TEP
May 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

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