Development Securities V HMRC [2017] UKFTT 565

By Parry, Adam; Asfar, Omar Massoud | Business Law International, January 2018 | Go to article overview

Development Securities V HMRC [2017] UKFTT 565


Parry, Adam, Asfar, Omar Massoud, Business Law International


Introduction

Companies resident in the UK for tax purposes are liable for UK corporation tax. There are two tests that may be used to determine such residence. The first is a statutory incorporation test - a company is regarded as resident in the UK if it is incorporated in the UK. The second is a common law test deriving from the case of De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198, under which a company may be treated as resident in the UK if it is incorporated outside the UK but its 'central management and control' is exercised within the UK.

The case of Development Securities v HMRC [2017] UKFTT 565 ('Development Securities') is the most recent case to come before the tribunals on the 'central management and control' test and illustrates an increasing level of tenacity on the part of HMRC in establishing the genuine place of management in instances in which corporate residence may be in question.

Summary and background

The case relates to a tax planning scheme that was launched over the summer of 2004.1 Having taken advice from its UK advisers on how to structure the group's tax affairs, Development Securities plc (the 'parent company' or 'parent') developed a tax plan intended to create an increased capital loss by introducing an indexation element but without suffering a UK tax charge. The parent would grant options to purchase certain UK assets to newly incorporated Jersey subsidiaries. These subsidiaries would then exercise the options and purchase the assets at an overvalue (comprising the parent's historic base cost plus indexation) and proceed to migrate their residence to the UK. The fundamental reason for the plan was that UK capital gains rules provide that the amount of a capital loss that can be offset against chargeable gains will not be increased by indexing the base cost upwards, whereas an indexation allowance is available to reduce a chargeable gain. As the parent's disposal of the assets would be for an amount equal to the parent's base cost in the assets plus indexation, the group would not incur a UK tax charge on the disposal. Provided the subsidiaries were not UK tax resident at the time, they would acquire the assets for capital gains purposes for the actual amount paid rather than the market value. However, once the subsidiaries became UK tax resident, they would sell the assets and thereby create an indexed capital loss in the group.

The plan was implemented from June to July 2004. Three Jersey companies were incorporated in earlyJune with a nominee shareholder acting on behalf of the parent. Their respective boards comprised several Jersey individuals from a corporate service provider but importantly included the parent's company secretary, who had been informed of the overall plan before taking his role. Over the following weeks, the boards of the Jersey companies held a number of board meetings (all of which took place in Jersey) in which they:

1. were notified that the parent proposed granting conditional call options to the Jersey companies over select UK assets of the parent;

2. agreed to the transaction following receipt of shareholder approval;

3. exercised the options when the conditions were met; and

4. accepted the resignation of the Jersey directors as part of the companies' migration to the UK.

HMRC determined that the Jersey companies lacked independence during the relevant period, with their central management and control resting with the parent and being exercised in the UK. Consequently, HMRC concluded that the Jersey companies were UK tax resident and the planning failed to achieve its aim. The group appealed to the First-tier Tribunal (the 'Tribunal').

The First-tier Tribunal decision

The Tribunal determined that the Jersey companies were solely UK tax resident. Applying the test for central management and control set out by Loreburn LJ in De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198, the Tribunal concluded that the 'real business' of the companies was to 'undertake the parent's plan'. …

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