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Peter Vaines reviews a number of tax developments over the last few weeks.

 

 

The case of Development Securities Plc (and Others) v HMRC [2019] UKUT 169 has now been heard by the Upper Tribunal. It was concerned with whether the Jersey subsidiaries of Development Securities Plc were resident in the UK or in Jersey. This is a familiar issue on which there is lots of authority.

 

It was all to do with the classic test of corporate residence being the place of Central Management and Control. This was famously explained by Lord Loreburn in De Beers Consolidated Mines v Howe [1906] AC 455 where he said that we must look to see where the company keeps house and does business, and where the chief seat of power is found. The central management and control abides where the real business carried on.

 

More recently in Wood v Holden [2006] EWCA 26 the Court of Appeal held that in the case of a parent and subsidiary, it is not enough that the subsidiary makes decisions in accordance with the parent’s wishes. The central management and control test distinguishes between influence and control. Mere influence is not enough. There is a difference between usurping the power of the board to take decisions concerning the company, and ensuring that the board knows what the parent company desires the decisions to be. Only where the parent controls the subsidiary by taking decisions which should properly be taken by the directors, does the central management and control vest with the parent.

 

In the case of Development Securities the FTT acknowledged that the Jersey companies were operated by highly experienced professionals who behaved entirely properly at all times. They gave full and independent consideration to all the questions facing them, and would certainly not have been susceptible to being leant on by a third party. Their decisions were documented by full minutes. Nevertheless, the FTT decided that the Jersey subsidiaries had no commercial objective to their decisions and concluded that the central management and control was exercised at a higher level, namely in the UK where the decision to use the offshore company for wider group purposes was taken. It is interesting that although the decision making process and the decisions of the directors were reflected in the minutes signed by all the directors, the FTT regarded those minutes as less important than the notes taken by an administrator who was not even present at the appeal hearing. The FTT made frequent references to her notes saying:

 

“Whilst we accept that the typed minutes are important evidence, we regard them as somewhat secondary to Ms Hembury’s notes”.

 

It is an odd concept that the formal minutes of board meetings signed by all the directors who took the decisions should be disregarded in favour of some handwritten notes by an administrator. The FTT was at pains to say that the directors did not act in any way improperly – so why their carefully considered and fully documented decisions should be disregarded is difficult to understand.

 

Anyway it does not matter because the Upper Tribunal has allowed the appeal, deciding that the Jersey directors did not abdicate their decision making responsibility and that the FTT was wrong in saying that they were merely following instructions of the parent.

 

The Jersey directors understood the issues and properly applied their minds to the relevant transactions with the result that the central management and control was exercised in Jersey.

The Upper Tribunal set out a lengthy series of propositions following the principles in De Beers and Wood v Holden set out above but noting crucially that the court must be astute to detect shams, where a company appears to have its central management and control in one country whereas in reality it is exercised by another body in another country. It is a question of fact which is determined by a scrutiny of the course of the business and trading.

 

The CIOT have published a note explaining that a statement has recently been added to the SDLT Manual explaining that the HMRC guidance has not (yet) been updated to reflect the Supreme Court decision in "Project Blue" - Project Blue Ltd v HMRC [2018] UKSC 30 - which was all to do with the application of section FA 2003 s 75A.

 

The CIOT rightly point out that this gives the unwary reader a warning that the HMRC guidance on this important subject cannot be relied on to represent accurate guidance.

 

I guess it might be said that because s75A is an anti-avoidance provision, anybody likely to fall within it is bound to know about Project Blue and would not be misled by the Manual. However, anybody who has read the case of Hannover Leasing Wachstumswerte Europa Beteiligungsgesellschaft MbH and another v HMRC [2019] UKFTT 0262 (TC) will know that the scope of the section is so wide that perfectly ordinary transactions containing no tax avoidance motivation are caught by s 75A.

 

HMRC say that they will update the guidance at the earliest opportunity – which will clearly be welcome.

 

The CIOT has been busy on our behalf and have issued a note about a standard letter being written by HMRC where they have received information indicating that a taxpayer has foreign income or gains.

 

The extensive new information sources available to HMRC mean that they get an enormous amount of information and they naturally want to check whether there have been any omissions from individual’s tax returns.

 

In principle that seems absolutely fair – and indeed very helpful as a reminder in case anything has been overlooked. However, some people see it differently – particularly as the letter tells them that they should sign and return a certificate confirming their tax position (with references to awful penalties). The certificate contains the same declaration that was on their tax return (except that it is unlimited in time) – so a taxpayer may wonder why he should have to do it again.

 

The CIOT confirm that there is no legal authority for HMRC to require such a certificate and that people “should consider very carefully whether to sign and return the certificate”. This looks like code for Don’t Do It. Indeed, they give the same advice where the taxpayer has irregularities to disclose; they suggest that a response by letter would be good practice.

 

Despite the irritation it will cause in many cases, some response to the letter would clearly be wise because ignoring it would inevitably result in some kind of further action by HMRC (well, it would, wouldn’t it) which is bound to be unwelcome.