Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT/000086, 87, 89/2022 - [2024] UKUT 00058 (TCC)

Fecha: 01-Dic-2023

Decisions subsequent to Smallwood

Decisions subsequent to Smallwood

119.

The decision of the Court of Appeal in Smallwood has been the subject of judicial consideration in the Court of Appeal and the Supreme Court in the following cases:

(1)

R (otao Haworth) v HM Revenue and Customs[2019] EWCA Civ 747; [2021] UKSC 25 in the Court of Appeal and the Supreme Court, and

(2)

HM Revenue and Customs v Development Securities Plc [2020] EWCA Civ 1705 in the Court of Appeal.

120.

Mr Rivett relied on what was said in Haworth by the Court of Appeal and the Supreme Court as supporting his analysis that Smallwood was simply an application of Edwards v Bairstow and otherwise endorses Wood v Holden as the correct approach to determine the POEM of a trust.

121.

We have already mentioned that Mr Haworth commenced a judicial review claim against HMRC’s decision to issue him with a follower notice and an accelerated payment notice. The notices were given on the basis that for the purposes of section 204(4) Finance Act 2014 the “principles laid down or reasoning given” in the ruling of the Court of Appeal in Smallwood would deny the tax advantage that Mr Haworth was claiming from the arrangements. The High Court dismissed the claim on the basis that the principles and reasoning contained in the judgment of Hughes LJ in Smallwood were capable of application to other similar schemes entered into by other taxpayers. On appeal, it was contended that the legislation was not engaged because Smallwood was simply an application of the principles in Edwards v Bairstow. HMRC had misdirected themselves in two material respects. Firstly, because they had misunderstood and overstated the significance of the judgment of Hughes LJ. Secondly, because they proceeded on the basis that a follower notice could be given where HMRC was of the opinion that it was more likely than not that the principles and reasoning in Smallwood would deny the tax advantage.

122.

Newey LJ (with whom Sir Timothy Lloyd and Gross LJ agreed) referred to the decision of the Court of Appeal in Smallwood, stating at [9] and [10]:

… Patten LJ noted in paragraph 49 of his judgment that counsel for Mr and Mrs Smallwood "accepts that this is the test to be applied and that what has to be identified is the place where the real top-level management of the trustee qua trustee occurred rather than the day to day administration of the trust".

10.

Where the members of the Court of Appeal parted company was on the application of the test.

123.

It is the first misdirection described above which is relevant for present purposes. Newey LJ found that HMRC had misdirected themselves:

41.

Mr Goodfellow's criticism was essentially that HMRC proceeded on the basis that Hughes LJ had held in Smallwood that the POEM was in the UK when he had actually been saying no more than that the Special Commissioners had been entitled to arrive at that conclusion.

42.

I have referred in paragraphs 14 and 15 above to the submissions that were before [HMRC’s Workflow Governing Group] when they decided to approve the follower notice given to Mr Haworth. It will be seen that those submissions stated that in Smallwood the Court of Appeal found that "the need to ensure that the share sales took place during the Mauritius trusteeship and then that the UK trustees took their place … meant that the POEM of the trust was not Mauritius but necessarily in the UK" and that Hughes LJ "found that the POEM was necessarily in the UK as the inevitable consequence of the tax scheme".

43.

Hughes LJ did not in fact go that far. It can be seen from his judgment, from which I have quoted in paragraph 10 above, that he had Edwards v Bairstow well in mind. He explained that the taxpayer could succeed "only if the Special Commissioners reached a conclusion of fact which was simply not available to them, and thus made an error of law" (paragraph 67) and that he did "not think that it is possible to say that [the Special Commissioners] were not entitled to find that the POEM of the trust was in the United Kingdom in the fiscal year in question" (paragraph 70). Shorn of context, the final sentence of paragraph 70 ("There was a scheme of management of this trust which went above and beyond the day to day management exercised by the trustees for the time being, and the control of it was located in the United Kingdom") could be taken to represent Hughes LJ's own view of the position, but Mr Brennan fairly accepted that, in the light of what had been said earlier, Hughes LJ is better understood as having meant no more than that it was open to the Special Commissioners to make such a finding.

124.

Gross LJ agreed with Newey LJ, but added some observations of his own, in particular at [67]:

67.

… [I]n the present case, HMRC misdirected themselves by placing more weight on the decision in Smallwood v R&C Comrs [2010] EWCA Civ 778; [2010] STC 2045, than it can bear. Correctly understood, the judgment of Hughes LJ (as he then was), especially at [67] and [70], went no further than holding that the Special Commissioners had been entitled to conclude that the POEM of the trust there in issue was in the United Kingdom. On that footing, however, the "principles laid down, or reasoning given" (FA 2014, s.205(3)(b)) in Smallwood do not suffice to assist HMRC here.

125.

The Court of Appeal in Haworth was dealing with a specific allegation of misdirection by HMRC. It found that HMRC had overstated the significance of the judgment of Hughes LJ because HMRC proceeded on the basis that as a consequence of entering into the scheme, the POEM of the trust was “necessarily” in the UK. The Court of Appeal was not seeking to identify the precise nature of the disagreement between Patten LJ and Hughes LJ. It is clear from the decision of Patten LJ that the parties in Smallwood were agreed as to the nature of the test for POEM. The issue we have to determine is how that test fell to be applied and whether it was necessary to have regard to Wood v Holden in applying the test. The Court of Appeal in Haworth was not called upon to address that issue.

126.

In the Supreme Court, Lady Rose gave a judgment with which the other Justices agreed. She addressed the disagreement between Patten LJ and Hughes LJ at [24] – [26] when describing the ruling in Smallwood:

24.

Patten LJ held that the Special Commissioners’ findings did not support a conclusion that effective management of the trust took place in the UK. He adopted the test set out in Wood v Holden [2006] EWCA Civ 26; [2006] 1 WLR 1393 so that the POEM of the trust turned on whether the critical decisions of the Mauritian trustee company were taken by its board of directors, albeit on the advice and at the request of KPMG, or whether that board had ceded any discretion in the matter to KPMG by agreeing to act in accordance with their instructions: para 61.

25.

Patten LJ did not accept, applying that test, that the Special Commissioners could properly have concluded that the POEM of the corporate trustee lay in the UK rather than in Mauritius. The trustee’s functions had not been “usurped” in the sense described in Wood v Holden. The Special Commissioners’ conclusions were not ones which were open to them on the evidence or on the findings of fact which they made. He would have dismissed the appeal.

26.

Patten LJ was however in the minority on the POEM issue. Hughes LJ also prefaced his conclusions by reiterating that the Special Commissioners’ finding on the issue of the POEM was one of fact so that the Smallwoods could only succeed on Edwards v Bairstow grounds. He agreed that the Special Commissioners’ findings did not go so far as to establish that the functions of the corporate trustee had been wholly usurped in the sense described in Wood v Holden. If that were the test, then there may well have been an Edwards v Bairstow error. But he held that the test was the POEM of the trustees as a single and continuous body of persons as distinct from any particular corporate trustee at any particular time. On that basis, he said:

“70.
On the primary facts which the Special Commissioners found at paras 136-145, which are set out in the judgment of Patten LJ, I do not think that it is possible to say that they were not entitled to find that the POEM of the trust was in the United Kingdom in the fiscal year in question. The scheme was devised in the United Kingdom by Mr Smallwood on the advice of KPMG Bristol. The steps taken in the scheme were carefully orchestrated throughout from the United Kingdom, both by KPMG and by Quilter [the nominee shareholder]. And it was integral to the scheme that the trust should be exported to Mauritius for a brief temporary period only and then be returned, within the fiscal year, to the United Kingdom, which occurred. Mr Smallwood remained throughout in the UK. There was a scheme of management of this trust which went above and beyond the day to day management exercised by the trustees for the time being, and the control of it was located in the United Kingdom.”

127.

It seems to us that Lady Rose was recognising that Hughes LJ was applying a different test to Patten LJ. Whilst this was not part of the reasoning for the decision of the Supreme Court on whether there had been a misdirection by HMRC, it is consistent with our own view as to the nature of the disagreement. Lady Rose addresses the question of misdirection at [71] – [76] of her judgment. She notes at [74] that HMRC proceeded on the basis that if the pointers identified by Hughes LJ at [70] were present in a subsequent case then that would justify the issue of a follower notice. Her conclusion is at [75]:

75.

That does overstate the conclusion of the Court in Smallwood. Hughes LJ did not decide that it was an inevitable consequence of a scheme which shared the Smallwood pointers that its POEM would be the UK and not Mauritius. All the members of the Court of Appeal accepted that the test was that set out in the Commentary on article 4(3) of the Model Convention. That Commentary states that “no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management”. Although Hughes LJ summarised the findings of the Special Commissioners in para 70 of his judgment, he was not, in my view, listing those pointers as being necessary and sufficient to establish in any other case that the POEM of the trust is the UK. On the contrary, he referred to the full description of the primary facts found by the Special Commissioners as set out in the judgement of Patten LJ as supporting their finding that in Mr Smallwood’s case, the POEM of their trust had been the UK.

128.

It was not necessary for the Court of Appeal or the Supreme Court in Haworth to engage in the detailed analysis of the various decisions and judgments in Smallwood which have been the subject of submissions in this appeal. Their decisions were concerned with a particular misdirection alleged against HMRC which they found was established.

129.

We should add that Mr Stone also relied on a decision of the High Court of Australia in Bywater Investments v Commissioner of Taxation [2016] HCA 45. He did not place great emphasis on the decision and in our view it does not add anything to his detailed submissions on Wood v Holden and Smallwood.

130.

There have also been at least two decisions of the FTT which have considered the test for POEM in the light of the decision of the Court of Appeal in Smallwood. Firstly, a decision of Judge Bishopp, then President of the FTT, in Lee and Bunter v HM Revenue and Customs [2017] UKFTT 279 (TC). Secondly a decision of Judge Dean in Wesley v HM Revenue and Customs.

131.

Lee and Bunter concerned use of the round the world scheme and the POEM of the relevant trusts. The FTT considered Smallwood and Wood v Holden. It held on the facts that there was instruction given to the trustees and the POEM was in the UK. Again, Mr Stone did not place much reliance on the decision and in our view it does not add anything to his detailed submissions on Smallwood.

132.

HMRC’s reliance on Wesley proved to be problematical. That is because at the date of the hearing before us, the decision had not been published. We now know that it had been released to the parties in that case on 15 February 2021. Mr Rivett on behalf of the appellants took issue with HMRC seeking to rely on an unpublished decision of the FTT. We decided not to have regard to the decision and indicated, at the hearing, that we would give our reasons in this decision. For the sake of clarity, we do so as an annex to this decision which should be treated as forming part of the decision.