UK Upper Tribunal Upholds Findings on Place of Effective Management in Tax Avoidance Case

Citation: [2024] UKUT 58 (TCC)
Judgment on

Introduction

In the case of Geoffrey Richard Haworth & Ors v The Commissioners for HMRC: UKUT-TCC 2024 58, the Upper Tribunal (Tax and Chancery Chamber) considered an appeal against the decision of the First-tier Tribunal (Tax Chamber) on the efficacy of a tax planning arrangement known as the “round the world” scheme. Central to the appeal was the determination of the “place of effective management” (POEM) of a trust, crucial for establishing residency status under the UK/Mauritius double taxation treaty.

Key Facts

The appellants, Mr. Haworth and Mr. Lenagan, were settlors of separate family trusts that participated in a tax avoidance scheme intended to prevent capital gains tax on disposals of shares around the flotation of TeleWork Group Plc. For the scheme to succeed, the trusts had to become resident in Mauritius at the time of disposal. The First-tier Tribunal (FTT) found that the POEM of the trusts during the relevant period was in the UK. The appellants argued that the FTT applied the wrong test to identify the POEM of the trusts, contending it should follow the precedent set in Wood v Holden concerning the identification of the central management and control of a company, and the court’s earlier findings in HM Revenue and Customs v Smallwood.

The case centered around several legal principles:

  1. Place of Effective Management (POEM): Determining the POEM is essential in applying the UK/Mauritius double taxation treaty. POEM is generally seen as the place where key management and commercial decisions are made. However, what constitutes “effective management” was disputed.

  2. Central Management and Control: The appellants suggested the court should apply principles from Wood v Holden, which established that a company’s residence is where its central management and control actually abides unless management functions are usurped by others.

  3. Usurpation of Decision-Making Power: Usurpation occurs when a third party, not part of the formal decision-making process, effectively dictates or instructs the decisions of the entity’s authorized body.

  4. Edwards v Bairstow Challenge: Pertinent to the judicial review process, this principle permits a challenge when a tribunal reaches a factual conclusion that is not viable—essentially amounting to an error of law.

  5. Tax Avoidance Scheme (Round the World Scheme): The efficacy of tax avoidance schemes concerning the trustees’ decision-making process and intent.

  6. Tax Residence: Determination of the tax residence of trustees for a settlement for the purposes of capital gains tax under UK tax law and related treaties, as governed by specific sections of the Taxation of Chargeable Gains Act 1992.

Outcomes

  1. Test for POEM: The Upper Tribunal found that the First-tier Tribunal was correct in not applying the test from Wood v Holden. Instead, it applied the test from Smallwood, focusing on where the trust’s actual top-level management occurred beyond the day-to-day management by the trustees.

  2. Findings on POEM: The Upper Tribunal agreed with the FTT’s findings, including that the relevant decisions which constituted effective management were made in the UK.

  3. Edwards v Bairstow: Patten LJ in the Court of Appeal had initially found that, applying the Wood v Holden reasoning, the SpC decision had errors of law. However, Hughes LJ, representing the majority view, disagreed, framing the question of POEM as concerning the trustees as a continuing body—a view which the Upper Tribunal found persuasive.

Conclusion

In Geoffrey Richard Haworth & Ors v The Commissioners for HMRC, the Upper Tribunal upheld the FTT’s finding that the POEM of the trusts in question was in the UK. The decision clarifies that the POEM test should not be conflated with that used for identifying a company’s central management and control; rather, it requires an examination of where the real top-level trust management occurs. The decision reaffirms the approach taken in Smallwood, considering the trustees as a continuous body rather than focusing solely on isolated decisions or periods. The tribunal’s choice further emphasizes that not every aspect of tax planning schemes will shift the POEM outside the UK when the scheme’s development, orchestration, and temporary relocations are controlled from within the UK.

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