It is well-established law that a company registered outside the UK is resident in the UK for tax purposes if its ‘central management and control’ is exercised in the UK. The courts have said (in Wood v Holden 78 TC 1) that in examining the question:
‘... 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.’
Quite separately, most double taxation treaties contain a ‘tie-breaker’ provision dealing with the circumstance that a non-individual person is resident in both of the treaty countries. The tie-breaker normally awards residence (‘treaty residence’) to the country in which the ‘place of effective management’ (POEM) is situated.
Do the two terms mean the same thing? That was the key question considered by the Upper Tribunal (UT) in Haworth and others v HMRC [2024] UKUT 58 (TCC) (reported in Tax Journal, 9 April 2024), which concerned the POEM of a trust whose trustees were resident in Mauritius.
The First-tier Tribunal (FTT) had thought that the Court of Appeal had in an earlier case (Smallwood [2010] EWCA Civ 778) decided that the expressions were not coterminous, though the FTT ‘[did] not find it easy to understand the basis for the distinction’. The FTT held that to find the POEM of a trust it was necessary to consider ‘in which state the real top-level management (or the realistic, positive management) of the trustee qua trustee is found’ and that it was not necessary, in order for the POEM to be somewhere other than Mauritius, for them to find that the powers of the trustees had been ‘usurped’. The FTT found that, on the facts of the case before it, the POEM was in the UK.
Before the UT, it was argued for the taxpayer that the FTT had misunderstood what the Court of Appeal had said in Smallwood and thus applied the wrong test: that on a correct reading of Smallwood the Court had said that establishing POEM required application of the Wood v Holden test. Thus, if the powers of the Mauritian-resident trustees had not been usurped, the POEM was inevitably in Mauritius.
The UT closely analysed earlier case law and concluded that the taxpayer was wrong: ‘Smallwood was a case where there was no usurpation of the trustees and the majority of the Court of Appeal endorsed a test for POEM which involved looking at the circumstances in which the scheme was devised and implemented. It was not necessary to apply the tool of Wood v Holden.’
This is not an easy case to grasp. It’s difficult to see how the ‘real top-level management (or the realistic, positive management)’ of a foreign-resident corporate trustee can be exercised in the UK unless the powers of the trustee have been usurped, but that is the scenario with which we have to deal. But at its very simplest level, we are on notice of the risk that some structures which have hitherto been considered to be ‘treaty resident’ outside the UK may require re-examination.
It is well-established law that a company registered outside the UK is resident in the UK for tax purposes if its ‘central management and control’ is exercised in the UK. The courts have said (in Wood v Holden 78 TC 1) that in examining the question:
‘... 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.’
Quite separately, most double taxation treaties contain a ‘tie-breaker’ provision dealing with the circumstance that a non-individual person is resident in both of the treaty countries. The tie-breaker normally awards residence (‘treaty residence’) to the country in which the ‘place of effective management’ (POEM) is situated.
Do the two terms mean the same thing? That was the key question considered by the Upper Tribunal (UT) in Haworth and others v HMRC [2024] UKUT 58 (TCC) (reported in Tax Journal, 9 April 2024), which concerned the POEM of a trust whose trustees were resident in Mauritius.
The First-tier Tribunal (FTT) had thought that the Court of Appeal had in an earlier case (Smallwood [2010] EWCA Civ 778) decided that the expressions were not coterminous, though the FTT ‘[did] not find it easy to understand the basis for the distinction’. The FTT held that to find the POEM of a trust it was necessary to consider ‘in which state the real top-level management (or the realistic, positive management) of the trustee qua trustee is found’ and that it was not necessary, in order for the POEM to be somewhere other than Mauritius, for them to find that the powers of the trustees had been ‘usurped’. The FTT found that, on the facts of the case before it, the POEM was in the UK.
Before the UT, it was argued for the taxpayer that the FTT had misunderstood what the Court of Appeal had said in Smallwood and thus applied the wrong test: that on a correct reading of Smallwood the Court had said that establishing POEM required application of the Wood v Holden test. Thus, if the powers of the Mauritian-resident trustees had not been usurped, the POEM was inevitably in Mauritius.
The UT closely analysed earlier case law and concluded that the taxpayer was wrong: ‘Smallwood was a case where there was no usurpation of the trustees and the majority of the Court of Appeal endorsed a test for POEM which involved looking at the circumstances in which the scheme was devised and implemented. It was not necessary to apply the tool of Wood v Holden.’
This is not an easy case to grasp. It’s difficult to see how the ‘real top-level management (or the realistic, positive management)’ of a foreign-resident corporate trustee can be exercised in the UK unless the powers of the trustee have been usurped, but that is the scenario with which we have to deal. But at its very simplest level, we are on notice of the risk that some structures which have hitherto been considered to be ‘treaty resident’ outside the UK may require re-examination.
