Upper Tribunal Tax and Chancery Chamber

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

Fecha: 01-Dic-2023

The grounds of appeal and the parties’ submissions in outline

The grounds of appeal and the parties’ submissions in outline

57.

The appellants have permission to appeal on two grounds:

(1)

The Appellants’ primary ground of appeal is that the FTT made an error of law in its approach to POEM. In particular, the FTT erred in holding that Hughes LJ in Smallwood was rejecting the Wood v Holden test and applying a different legal test (specifically the approach of the Special Commissioners).

(2)

The Appellants also challenge the FTT’s decision on the further ground that the Tribunal erred in its application of the law to the facts. In particular, the FTT erred in holding that the ‘decisions’ to devise the plan and the desire and expectation that the trustees would agree to that plan constituted the “top-level” management of the trusts, whereas the actual decisions of the Mauritius trustees to enter into the various individual transactions which implemented that plan constituted lower level decisions.

58.

The appellants’ arguments on both grounds were summarised at [55] of their skeleton argument:

55.

The proper test by which to identify the POEM for the purposes of Article 4(3) of the UK/Mauritian Treaty is that articulated in Wood v Holden 78 TC 1 which identifies the place of effective management as being the place in which the binding decisions are made by the authorised decision-making body (in this case the trustees of the various trusts) unless that decision-making function has been ‘usurped’. In this regard, the fact that certain decisions involve adopting a plan or proposals devised and superintended by someone else is not sufficient to conclude that decision-making has been ‘usurped’ such as to displace the location of the effective management from that place in which actual decisions are taken.

59.

The appellants contend that the FTT failed to properly articulate the test it was applying to determine the POEM of the trusts. Whatever test it did apply was derived from a misreading of the Court of Appeal decision in Smallwood. The appellants say that the correct test is identical to that described in Wood v Holden in the context of identifying the location of the central management and control of a company. It is the place where binding decisions are made by the authorised decision-making body, unless that decision-making function has been “usurped”. The fact that certain decisions of the trustees in this case involved adopting a plan or proposal devised and superintended by someone else in the UK is not sufficient to conclude that the decision-making function of the Mauritius trustees had been usurped. The FTT was therefore wrong to find that the POEM of the trusts was the UK.

60.

Mr Rivett submitted that we are bound by the reasoning of the Court of Appeal in Smallwood, which endorsed the test set out in Wood v Holden. He relied on the following statements of principle derived from Wood v Holden:

(1)

The approach to identifying the location of central management and control of an entity involves the same enquiry as identifying the location of the POEM of an entity.

(2)

The enquiry requires identifying the location where high-level decisions are made, which is normally where the authorised decision-making body meets.

(3)

That will be the POEM, unless the decision-making functions have been usurped.

(4)

The relevant high-level decisions must be identified with care and do not include decisions which fall to other parties.

(5)

There is no usurpation where a body accepts a proposal or advice which it considers is in the best interests of the entity.

(6)

The fact that the issue arises in the context of tax planning arrangements does not affect the enquiry.

61.

Save as to (1) and the reference to POEM in (3), HMRC broadly accept these propositions in the context of identifying the location of central management and control of a company. They say those principles do not apply in the context of identifying the POEM of a trust.

62.

If Mr Rivett is right about the proper test to be applied, he says that the only conclusion available on the facts is that the POEM of the trusts during the “Mauritius Period” was in Mauritius. In particular, he says that there were multiple layers of decision-making involved in implementing the scheme. The scheme involved a number of different decisions, as follows:

(1)

the decision of the Jersey trustees to retire and of the settlors to appoint Mauritius trustees;

(2)

the decision to make various appointments of shares and cash from the family trusts into discretionary and other sub-funds and for the benefit of beneficiaries;

(3)

the decision of the shareholders to merge the companies, through the share-for-share exchanges;

(4)

the decision to sell shares through the flotation by entering into the placing agreement, including a decision to give DKB authority to sell additional shares through the greenshoe option;

(5)

the decision of the Mauritius trustees to retire as trustees of the family trusts in October 2000 in order to give effect the tax planning;

63.

Mr Rivett observed that it was a matter for the board of directors of Teleware and Workplace to decide whether to consider and pursue the merger and flotation. As minority shareholders, the trustees were not concerned in that decision, unless and until the directors formulated a proposal which required the consideration of shareholders. The “relevant” decisions of the trustees in testing the POEM of the trusts during the period when the Mauritius trustees were in place from 28 June 2000 to 24 October 2000 (“the Mauritius Period”) were the decisions at (2) – (5). Those were the decisions which the trustees were empowered to make and the question was whether their functions had been usurped in relation to those decisions. The fact that those decisions might be part of a plan devised by someone else is not sufficient to conclude that the decision-maker has been usurped.

64.

Mr Rivett relied on various findings of the FTT to the effect that the Mauritius trustees were appointed on the basis that they were expected to act diligently and properly, and it was understood that the proposed transactions were in the interests of the beneficiaries. The trustees had not agreed to take the relevant decisions at the time of appointment, unlike the trustees in Smallwood. They were free not to take the relevant decisions and the reason it was expected that they would take the decisions was only because there were cogent commercial and tax advantages in doing so. The FTT found that the relevant decisions were taken by the Mauritius trustees and not by anyone else. They were not instructed or directed to take those decisions and there was no finding that their functions as trustees had been usurped.Mr Rivett submitted that none of the findings of the FTT come close to finding that their functions were usurped. If the FTT had applied the correct test based on Wood v Holden, it could only have found that the POEM of the trusts was in Mauritius during the Mauritius Period.

65.

Mr Stone’s case was relatively straightforward. He says that the test for POEM is not based on Wood v Holden but is the test applied by the SpC in Smallwood, which was endorsed by the majority of the Court of Appeal. We shall consider his detailed submissions in that regard in the discussion which follows.