A group of companies, parented by Development Securities plc (DS), has lost their case at the Court of Appeal (CoA) on a tax case that concerned the tax residence of certain Jersey subsidiaries.  DS owned some subsidiaries and real estate whose market values back in 2004 were not as much as they had paid and could therefore generate tax losses that the group could allocate against other expected gains.  The future expected gains were sufficient enough that it was sensible to consider indexation allowance to increase the value of capital tax losses.  Indexation allowances can only decrease a gain, they cannot create or increase a loss.

A scheme was devised by a Big 4 firm of accountants where the shares and properties were sold to Jersey based subsidiaries at over market value (inclusive of the indexation allowance), by way of options, the subsidiaries would then become UK residence and sell the assets at the market values but with base costs for capital gains purposes much higher than before the transactions involving the new Jersey subsidiaries.  At the tribunals and the court, it was common ground that the scheme would be effective where the new Jersey subsidiaries were considered tax resident in Jersey.

The First-tier Tribunal (FTT) held that the central management and control (CMC) of the Jersey subsidiaries was not in Jersey but the UK as the Jersey subsidiaries had only administrated for the scheme without any consideration of the strategic implications of the transactions.  There were certain Jersey corporate law aspects and the Jersey directors had considered this issue but beyond checking the legality of the transactions they weren’t involved in the decision to acquire the underlying assets despite there being evidence of the directors’ engagement.  The Upper Tribunal (UT) overturned this decision and HMRC then appeal to the CoA.

The CoA held that the arguments given by the UT when overturning the FTT’s decision were not sound and were forced to overturn the UT’s decision.  One of the judges, while agreeing that the UT decision was flawed, distanced himself from the initial FTT decision and didn’t want to be seen approving it.

The decision can be found at: Revenue And Customs v Development Securities Plc & Ors – Find case law (nationalarchives.gov.uk)

This case doesn’t help clarify what is CMC for the purposes of the tax residence of companies though it did reference the long-established principles that developed the concept.  The fact that one of the judges distanced themselves from the FTT decision indicates that this case was finely balanced.  The taxpayers in this case may have been helped if more of the tax planning involved the Jersey directors from the outset along with recorded discussions about the actual assets being acquired.

Please contact us if you have any questions with tax residence of corporate vehicles or have any other international tax query.  We are experienced with these issues.