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

…The email continued:

“After taking Counsel's opinion it had been decided in principle that the Jersey trustee will resign in favour of Mauritius trustees, so that the trust becomes tax resident in Mauritius. Provided that the new trustees agree that it is sensible to sell the FG [FirstGroup] shares they will do so at some time within the next 3-4 months. If they sell the shares before 5 April 2001 they would then retire in favour of United Kingdom resident trustees, also before that date. If this course of action is followed, it is hoped that no United Kingdom tax liability will arise upon the sale as a result of the United Kingdom/Mauritius treaty.”

The email went on to ask if PMIL was "prepared to act as trustee on this basis" and asked for some advice on the tax implications and an indication of costs. In oral evidence which we accept Mr Turbervill told us that by those words he thought he meant that he was making it clear that he was offering PMIL an assignment which could potentially last for only three or four months. There was no stipulation that the shares had to be sold before 5 April 2001 although it was clear from the email that there was a hope and a confident expectation that the shares would be sold.

On 8 January 2001 at 12.21 pm Mr Turbervill sent an email to PMIL, Lutea, and Mr Bazzone saying:

Mr Turbervill told us that he did not regard this email as an instruction not to sell the shares but was just requesting the recipients to satisfy themselves that the deed of indemnity had been signed before any action was taken.

During the telephone meeting Mr Jingree reminded those present that the Trust had migrated to Mauritius within the context of a tax planning exercise and that the shares, if the trustees decided to sell them, had to be sold before the end of March or the beginning of April. He briefed Mr Koon and Mr Purgus that it was to the advantage of the beneficiaries that they should take a decision to sell the shares. As it was in the interest of the Trust and the beneficiaries the trustees thought it best to dispose of all the shares well before the end of the tax year. The price of the shares was also discussed. The meeting also discussed the appointment of the investment manager. The meeting agreed to proceed with the sale of all the FirstGroup shares. We accept the evidence of Mr Koon that the reason for that decision was because the sale was in the interests of the beneficiaries of the trust to maximise the trust fund by the proceeds not attracting tax in the United Kingdom. Following the telephone meeting Ms Taher and Mr Shah were instructed to proceed with the administrative matters relating to the sale, and the giving of the instructions for the sale, of all the FirstGroup shares.

There was thus some debate about whether, or to what extent, POEM differed from CMC. We consider that this misses the point; the two concepts serve entirely different purposes. CMC determines whether a company is resident in the United Kingdom or not; POEM is a tie-breaker the purpose of which is to resolve cases of dual residence by determining in which of two states it is to be found. CMC is essentially a one-country test; the purpose is not to decide where residence is situated, but whether or not it is situated in the United Kingdom, even though courts do sometimes express their decisions in terms of a company being resident in a particular foreign jurisdiction, as was the case in Wood v Holden.

POEM, on the other hand, must be concerned with what happens in both states since its purpose is to resolve residence under domestic law in both states, caused for whatever reason, which could include incorporation in one state and management in the other, or different meanings of management applied in each state, or different interpretations of the same meaning of management applied in each state, or divided management. One must necessarily weigh up what happens in both states and according to the ordinary meaning to be given to the terms of the treaty in their context … decide in which state the place of effective management is found… Accordingly, having regard to the ordinary meaning of the words in their context and in the light of their object and purpose we approach the issue of POEM as considering in which state the real management of the trustee qua trustee is found.

We turn to guidance from United Kingdom cases where the issue of POEM has arisen. First in time is Wensleydale's Settlement Trustees in which Special Commissioner David Shirley said of POEM in the ordinary meaning of language at 250j:

“I emphasise the adjective 'effective'. In my opinion it is not sufficient that some sort of management was carried on in the Republic of Ireland such as operating a bank account in the name of the trustees. 'Effective' implies realistic, positive management. The place of effective management is where the shots are called, to adopt a vivid transatlantic colloquialism.”

…We do not therefore obtain much assistance from these authorities apart from the "realistic, positive management" principle from Wensleydale.

The formulation of the preference criterion in the case of persons other than individuals was considered in particular in connection with the taxation of income from shipping, inland waterways transport and air transport. A number of conventions for the avoidance of double taxation on such income accord the taxing power to the State in which the 'place of management' of the enterprise is situated; other conventions attach importance to its 'place of effective management', others again to the 'fiscal domicile of the operator'. Concerning conventions concluded by the United Kingdom which provide that a company shall be regarded as resident in the State in which 'its business is managed and controlled', it has been made clear, on the United Kingdom side, that this expression means the 'effective management' of the enterprise.

24 As a result of these considerations, the 'place of effective management' has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made…

We see no reason why this approach should not be adopted even though it is in the Commentary issued after the Treaty. It is not significantly different from the earlier Commentary saying that POEM was the same as the reference to management and control in old United Kingdom treaties, which meant CMC, or the top level of management. But it is really aimed at a different situation, that of different levels of corporate management, which is not relevant here.

Accordingly, there is nothing in this additional material that changes our initial view that, having regard to the ordinary meaning of the words in their context and in the light of their object and purpose, we should approach the issue of POEM as considering in which state the real top level management (or the realistic, positive management) of the trustee qua trustee is found.

We now turn to apply that principle to the facts we have found and ask in which state the real top level management, or the realistic, positive management of the Trust, was found between 19 December 2000 and 2 March 2001.

The relevant facts

The tax planning scheme was devised by KPMG Bristol as tax advisers to Lutea, the previous trustee of the Trust. Mr Smallwood had retired as Chairman of FirstGroup and any restrictions on the sale of the FirstGroup shares had been lifted. A tax efficient way of diversifying the portfolio of investments held for the Trust was needed. The appointment of trustees in Mauritius had been the idea of Mr Turbervill and the details were described to Mr Smallwood as early as August 2000. Mr Smallwood had the power to appoint new trustees. It was Mr Turbervill who approached PMIL and told them about the tax planning proposals and set out the basis of their appointment in the email of 24 November 2000. That made it clear that the confident expectation was that the shares would be sold before 5 April 2001.

We accept the evidence of Ms Taher that she did not understand "the basis" referred to in the email of 24 November 2000 as to mean that the sale of the shares was a condition for PMIL to accept the appointment as trustee; her evidence was that the trustees would wish to receive appropriate advice and recommendations. However, she accepted that eventually as part of the tax planning exercise the shares would be sold at some time. We accept the evidence of Mr Jingree that there was no agreement that PMIL would behave in a certain way or make certain decisions as a quid pro quo for the introduction of the Trust. PMIL's duties as trustee were laid down in legislation and in the trust deed and PMIL would only act within the context of what it was allowed to do. We also accept the evidence of Mr Jingree that the whole point of the tax planning exercise was to sell the shares and to realise the gain and to avoid tax on the gain.

The facts surrounding the appointment of PMIL lead us to the view that the real top level management, or the realistic, positive management of the Trust, remained in the United Kingdom. We accept that the administration of the Trust moved to Mauritius but in our view the "key" decisions were made in the United Kingdom.

This view is confirmed by subsequent events. The sale of the FirstGroup shares was not an isolated decision taken by PMIL on 10 January 2001. It had been carefully arranged beforehand by the transfer of the shares to Quilter to be held in their nominee account. Further, Mr Bazzone of Quilter had been told of the tax planning exercise and that Quilter would be asked to dispose of the holding of FirstGroup shares after PMIL had been appointed. It was when Mr Bazzone of Quilter told Mr Gadd on 4 January 2001 that he needed instructions from the new trustees that Mr Turbervill prompted PMIL to get on with what they should be doing. At no time did Mr Bazzone recommend the sale of all the shares but the sale of all the shares fitted in with the tax planning scheme. When Mr Bazzone wrote on 6 January to PMIL about the sale of the shares Mr Jingree was away from the office and Mr Shah asked Mr Turbervill for advice. There was then a delay in PMIL receiving the deed of indemnity and Mr Turbervill sent his email of 8 January to PMIL, Lutea and Mr Bazzone that no instructions to sell the shares should be given until the deed had been received. PMIL also asked Mr Turbervill to help with the opening of the account with Quilter and Mr Turbervill suggested an investment objective of capital growth with medium risk. Even on the date of the decision to sell Mr Bazzone had to remind PMIL how many FirstGroup shares were to be sold. Mr James Baxter of Merchant took the initiative in obtaining a set of account opening forms for Merchant.

We accept the evidence of Mr Jingree that the sale of the shares was motivated by United Kingdom tax planning reasons. The purpose of selling all the shares was to ensure that the tax planning which had been put in place worked to the best advantage of the Trust and it was vital that all of the shares were sold prior to the end of March in order to achieve this. The decision to sell all the shares was made in the hope that all the shares could be sold before the end of March. However, if it had not been in the interests of the beneficiaries and the Trust, the trustees would not have sold the shares; "if the funds which had been realised had to go away in taxes then it would not have been in the best interests of the beneficiaries". Also, if the share price dropped dramatically, and if the fund manager had advised against a sale, then the trustees would not have decided to sell. We also accept the evidence of Ms Taher that the decision to sell all the shares was based upon tax planning and the need for the shares to be sold by a particular date. The fact that the share price had gone up was not the "driver" for the sale of the shares.

We fully accept that the decision to sell the shares that day was taken by the directors of PMIL at the telephone meeting on 10 January 2001. We also accept that if, for example, the price of the shares had fallen to a level that meant that no gain would be realised on their disposal, the shares would not have been sold but would have been retained and perhaps sold later. Nevertheless, in our view this was a lower level management decision as there was no doubt that the shares would be sold; the real top level management decisions, or the realistic, positive management decisions of the Trust, to dispose of all the shares in a tax efficient way, had already been, and continued to be, taken in the United Kingdom. The "key" decisions were made in the United Kingdom.

Finally the events after the sale of the shares confirm our view. The tax planning exercise was completed by the appointment of United Kingdom trustees. We remark that PMIL's fee note was approved by Mr Turbervill.

We conclude that the state in which the real top level management, or the realistic, positive management of the Trust, or the place where key management and commercial decisions that were necessary for the conduct of the Trust's business were in substance made, and the place where the actions to be taken by the entity as a whole were, in fact, determined between 19 December 2000 and 2 March 2001 was the United Kingdom.

…Both sides approached this issue by reference to what the Special Commissioners described as the Mauritius period: i.e. the period up to and including the sale of the shares during which PMIL remained the trustee. This was on the basis that it is in respect of the Mauritius period that the trustees are chargeable to tax in both Contracting States. The Special Commissioners were not asked to consider the issue of POEM over any longer period of time and made no findings of fact in respect of that. The result of adopting the same approach is that the Revenue's appeal will be allowed unless the trustees succeed in upholding their right to double taxation relief on the ground that the Special Commissioners erred in law on the issue of POEM. This is the additional point (not decided by Mann J) which is raised in the respondents' notice.

POEM is not defined in the DTA but was interpreted by the Special Commissioners as meaning the place which is the centre of top-level management: i.e. where the key management and commercial decisions are actually made. This is the test propounded by Professor Dr Klaus Vogel in his Commentary on the OECD Model Convention and has been adopted in German case law. It was also taken to be the correct test by the special commissioner (Mr David Shirley) in Wensleydale's Settlement Trustees v IRC [1996] STC 241.

Mr Prosser 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. But he submits that the top-level management of a company is usually carried out by its board of directors (as the Commentary suggests) unless it can be shown that the control of the company's affairs was effectively usurped and exercised by some third party and that the directors were content merely to rubberstamp the decisions which were taken. In this case there was, he says, no evidence or finding that KPMG Bristol or Mr Smallwood dictated the decision to sell the shares.

It goes almost without saying that, to succeed on the cross-appeal, the taxpayers must establish that the decision of the Special Commissioners on this point contained an error of law of the kind recognised by the House of Lords in Edwards v Bairstow [1956] AC 12. Mr Prosser therefore contends that it was not open to the Special Commissioners to find that the POEM of the trustee (PMIL) was anywhere but in Mauritius at the relevant time and, to have reached the conclusion which they did on the evidence, the Special Commissioners must therefore have applied the wrong test.

Mr Prosser says that none of these findings amounts to or includes one to the effect that KPMG or Mr Smallwood dictated or usurped the decision of PMIL to implement the scheme by selling the shares. Although the sales took place in accordance with the scheme devised and recommended by KPMG, the decision to sell remained that of PMIL acting through its own directors.

The findings of the Special Commissioners are to the effect that the tax scheme recommended by KPMG Bristol was implemented by PMIL in accordance with their advice. The impetus to comply with the scheme and to sell the shares with sufficient time to allow the Smallwoods to be appointed as trustees before 5^th April 2001 came from KPMG Bristol who, naturally enough, were concerned to ensure that their advice was followed. The assumption by the Special Commissioners that the trustees had an ultimate right to decline to sell the shares was a factor to be weighed in the balance against that.

Mr Prosser submitted that, on the findings of fact made by the Special Commissioners, the board of PMIL had itself taken the decisions necessary for the conduct of the company's business as trustee and therefore exercised effective management. He places particular reliance on the decision of the Court of Appeal in Wood v Holden [2006] EWCA Civ 26 where the issue was whether a company which disposed of shares as part of a tax scheme was resident in the UK. It was common ground that this question fell to be answered by applying the test set out by the House of Lords in De Beers Consolidated Mines Ltd v Howe [1906] AC 455 which is that a company resides where the central management and control actually abides. A finding on this basis that the company was resident in the UK would have led to a consideration in that case of the DTA between The Netherlands and the UK which contains the tie-breaking provisions of Article 4(3). Chadwick LJ expressed the view that it was difficult to draw any meaningful distinction between the two tests but that even if they did in fact differ in substance, they were unlikely to lead to different results.

The importance of the case for present purposes lies in the analysis by Chadwick LJ of what is capable of constituting management and control of a company by persons who are not its directors…:

“…

[27] In my view the judge was correct in his analysis of the law. In seeking to determine where 'central management and control' of a company incorporated outside the United Kingdom lies, it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs are 'usurped'—in the sense that management and control is exercised independently of, or without regard to, those constitutional organs. And, in cases which fall within the former class, it is essential to recognise the distinction (in concept, at least) between the role of an 'outsider' in proposing, advising and influencing the decisions which the constitutional organs take in fulfilling their functions and the role of an outsider who dictates the decisions which are to be taken. In that context an 'outsider' is a person who is not, himself, a participant in the formal process (a board meeting or a general meeting) through which the relevant constitutional organ fulfils its function."

The Special Commissioners said that Wood v Holden and the other authorities on residence did not ultimately assist on the question of where the POEM of PMIL was situated. They pointed out that the purpose of the Article 4(3) test is to allocate the right to tax between Contracting States, each of which regards the company as resident for tax purposes…

Although the purpose of the POEM test is effectively to decide between two rival claims to tax based on residence, the terms of the test, as set out in paragraph 24 of the Commentary quoted above, seem to me to lead inevitably to the question whether the effective decision by PMIL to implement the tax scheme and to sell the shares was taken by the board of directors of that company, albeit on the advice and at the request of KPMG Bristol, or whether the PMIL board effectively ceded any discretion in the matter to KPMG by agreeing to act in accordance with their instructions. Given that the directors of PMIL remained in place and exercised their powers as directors to effect the sale, the approach to this issue suggested by Chadwick LJ in Wood v Holden must be the right test.

The conclusion of the Special Commissioners (in paragraph 140 of their Decision) that the key decisions were made in the UK where the realistic, positive management of the trusts remained is said to be based on the facts surrounding the appointment of PMIL. It is clear that they were appointed as part of a pre-existing scheme which involved choosing Mauritius as the situs of the trust because of its favourable treatment of capital gains. It is equally clear that PMIL accepted the trusteeship on the basis that the shares would be sold as part of that tax planning exercise and that the shares were indeed sold in accordance with the scheme. But the Special Commissioners also accepted Mr Jingree's evidence that there was no agreement that PMIL would behave in a certain way or make certain decisions as a quid pro quo for the introduction of the trust and that had the sale of the shares not been in the interests of the beneficiaries as at the date of the sale then PMIL would not have agreed to sell.

I find it difficult to accept that on the basis of these findings the Special Commissioners could properly have concluded that the POEM of the trustees up to March 2001 lay in the UK rather than in Mauritius. The findings made do not go beyond saying that PMIL accepted the advice of KPMG to proceed with and implement the scheme in the interests of the beneficiaries. But they retained their right and duties as trustees to consider the matter at the time of alienation and did not (on the Special Commissioners' findings) agree merely to act on the instructions which they received from KPMG. The function of the directors was not therefore usurped in the sense described in Wood v Holden. It seems to me to follow that the Special Commissioners' conclusions are not ones which were therefore open to them on the evidence or on the findings of fact which they made.

On the issue of POEM, with suitable hesitation, I respectfully differ from Patten LJ.

The Special Commissioners' conclusion on the issue of POEM was one of fact. The taxpayers can succeed on their cross-appeal only if the Special Commissioners reached a conclusion of fact which was simply not available to them, and thus made an error of law: Edwards v Bairstow [1956] AC 12.

If the question were the POEM of the particular trust company trustee for the time being at the moment of disposal, namely PMIL, then it may be that the reasoning in Wood v Holden [2006] EWCA Civ 26 would justify the conclusion that the Commissioners fell into this kind of error. I agree that their findings do not go so far as findings that the functions of PMIL were wholly usurped, and I agree that Wood v Holden reminds us that special vehicle companies (or, no doubt, special vehicle boards of trustees) which undertake very limited activities are not necessarily shorn of independent existence; indeed they would be ineffective for the purpose devised if they were.

But it seems to me that to apply this reasoning to the present case is to ask the wrong question, and indeed to return to the rejected snapshot approach. The taxpayers with whom we are concerned under section 77 are the trustees. Trustees are, by section 69(1) TCGA 1992, treated as a continuing body:

“In relation to settled property the trustees of the settlement shall for the purpose of this Act be treated as being a single and continuing body of persons (distinct from the person who may from time to time be the trustees) and that body shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom.”

The POEM with which this case is concerned is, as it seems to me, the POEM of the trust, i.e. of the trustees as a continuing body. That is the question which the Special Commissioners addressed: see their paragraphs 140 and 145.

On the primary facts which the Special Commissioners found at paragraphs 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. 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.

The scheme was devised in the UK by Mr Smallwood on the advice of KPMG Bristol.

The scheme was carefully orchestrated throughout from the UK.

It was integral to the scheme that the trust should be exported to Mauritius for a brief period and then return to the UK, which occurred.

Mr Smallwood remained throughout in the UK.

The scheme of management of the trust went above and beyond the day to day management exercised by the trustees and was controlled from the United Kingdom.