Development Securities – Jersey-incorporated SPVs held not to be UK tax resident

In Development Securities plc and others v HMRC [2019] UKUT 0169 (TCC), the Upper Tribunal (UT) has held that a number of Jersey-incorporated companies were in fact resident for tax purposes in Jersey. This decision overturned the decision of the First-tier Tribunal (FTT), which had held that the companies were UK tax resident as a result of the central management and control (CMC) of the companies being exercised in the UK (through the companies’ parent). The UT took the view that the FTT had incorrectly concluded that the Jersey company directors had abdicated their decision-making responsibility.

Background

A group, headed by a UK resident parent, implemented a tax-planning arrangement designed and carefully implemented by its accountants. The aim of the arrangements was to allow the group to access latent capital losses on certain assets (including UK real estate) on the basis that the crystallised losses would include indexation. In broad terms, the proposal involved newly-established wholly-owned Jersey companies purchasing the assets at an artificially high price and selling them shortly afterwards at a loss. Critical to the success of the arrangements was that the Jersey companies would be treated as non-UK resident prior to the sale of the assets. 

The FTT agreed with HMRC that the tax planning arrangements were ineffective as the Jersey companies were UK tax resident throughout. The taxpayers appealed to the UT.

UT decision

The appeal was allowed.

The UT was dismissive of the reasons the FTT had given for its decision. The first reason (in the UT’s view the subsidiary reason) for the FTT’s decision was that the directors of the Jersey companies had a specific task entrusted to them by the UK parent, after which they were to resign. This specific task was to implement the tax planning arrangements devised by the UK parent with the help of its accountants. This was considered by the UT to be wholly irrelevant to the question of CMC. The UT referred to Wood v Holden [2006] STC 443, and commented that: 

“the mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent does not mean that central management and control vests in the parent”. 

With regard to the FTT’s primary reason for deciding that CMC of the companies was exercised in the UK, the UT considered the FTT's reasoning to be “untenable and wrong”. In the view of the FTT, the Jersey company directors had abdicated responsibility for exercising CMC due to the fact that, from the outset, they knew that they were being asked to cause the companies to act in a manner contrary to their commercial interests. In other words, according to the FTT, the Jersey company directors were not exercising CMC as they were not exercising their judgment as directors. In the UT’s view, the FTT had reached this view due to a fundamental misunderstanding. The FTT was incorrect to say that the Jersey companies acquired the assets on uncommercial terms ie at a price above market value. The purchases were funded by the parent, not the Jersey companies. 

Also, as the Jersey companies had no employees and there was no question as to the transactions prejudicing creditors, in the UT’s view the primary duty of the Jersey company directors was to their shareholders (ie the UK parent). Therefore, in acting as they did, the Jersey directors were not in breach of their duties. In the words of the UT: 

“the essential error committed by the FTT was to focus on the uncommerciality of the transactions to the individual Jersey companies without having regard to the actual duties the directors owed to those companies”. 

Comment

This decision provides helpful guidance when considering the CMC of SPVs. There is  a distinction between circumstances where a parent influences an SPV (so that CMC remains with the board of the SPV) and where a parent controls the SPV in such a way that decisions which should properly be taken by the board of the SPV are in fact taken by the parent. Such parent 'control' can be carried out in a number of ways, from usurping the SPV’s board functions to the SPV board simply ‘rubber stamping’ decisions taken elsewhere. On the facts of this case, the UT was of the clear view that the actions of the Jersey company directors did not amount to an abdication of CMC as they were not merely 'rubber stamping' decisions taken by the parent company.

A copy of the decision can be viewed here.