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

This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) released on 2 February 2022 (“the Decision”). The first and second appellants (“Mr Haworth” and “Mr Lenagan”) are the settlors of separate family trusts which engaged in a tax planning arrangement known as the “round the world” scheme. They hoped that the trustees of the family trusts would avoid capital gains tax on disposals of shares on the flotation of a company called TeleWork Group Plc. It is now common ground that the scheme was effective to achieve the capital gains tax savings if, amongst other things, the family trusts became resident in Mauritius by the time of disposal. The scheme would only be effective if the place of effective management (the “POEM”) of the trusts was in Mauritius.

A scheme of the same kind was considered by the Special Commissioners, High Court and ultimately the Court of Appeal in HM Revenue and Customs v Smallwood[2010] EWCA Civ 778. It was ineffective on the facts of that case because the Court of Appeal by a majority upheld the Special Commissioners’ decision that the POEM of the trust at the material time was the UK and not Mauritius. We shall have to consider the judgments in Smallwood in detail in due course.

The scheme was also relevant in the context of a claim for judicial review brought by Mr Haworth, in which he challenged HMRC’s decision to issue a follower notice and an accelerated payment notice based on the Court of Appeal’s decision in Smallwood. The judicial review went to the Supreme Court in R (otao Haworth) v HM Revenue and Customs[2021] UKSC 25 which upheld the decision to quash the follower notice and the accelerated payment notice.

The FTT in the present appeals held that the POEM of the trusts at the material time was the UK. As a result of that finding, together with its findings on other issues which are not subject to appeal, the FTT dismissed the appeals. The appellants appeal against the Decision with permission from the FTT.

The present appeals turn on a single point of law. The appellants say that the FTT applied the wrong test to identify the POEM of the trusts. It ought to have applied a test derived from the Court of Appeal decision in Wood v Holden 78 TC 1. The context of Wood v Holden concerned identifying the location of the central management and control of a company. However, there are statements in the judgment of Chadwick LJ that the test for identifying the location of central management and control of a company is in substance the same test as that for identifying the POEM of a company.

The Court of Appeal in Smallwood considered the POEM of a trust and it will be necessary for us to closely consider both these judgments. Essentially, the appellants say that the FTT failed to apply the test in Wood v Holden and misconstrued the reasoning of the Court of Appeal in Smallwood. If that is right, the appellants say that the only conclusion open to the FTT on the facts as found was that the POEM of the trusts at the material time was Mauritius. We should therefore set aside the decision of the FTT and re-make it so as to allow the appeals against HMRC’s closure notices.

The FTT dealt with a number of issues which are no longer in dispute. The Decision stretches to 163 pages, much of which involves an analysis of the evidence and the FTT’s findings of fact. Fortunately, for present purposes we can state the facts relatively briefly. Before doing so it will be helpful to describe the context in which the issue arises and the legal framework which underpinned the avoidance scheme.

Both parties acknowledged that if the FTT applied the wrong test for POEM, then the appeal should be allowed and we should re-make the decision, identifying the POEM of the trusts based on the FTT’s findings of fact. Neither party suggested that the matter should be remitted to the FTT to make a further determination. We are content to proceed on that basis. At one stage Mr Rivett KC for the appellants, submitted that even if the correct test was not that derived from Wood v Holden then the FTT ought to have found that the POEM was in Mauritius. He did not pursue that argument, and accepted that if we were to find that the FTT applied the right test, then the appeals should be dismissed.

We are grateful to all counsel for their clear and helpful submissions, written and oral, and to those instructing them. Mr Stone appeared as lead counsel for HMRC following the sad death of Mr Timothy Brennan KC, who had appeared before the FTT.