[2006] EWCA Civ 26

The Court of Appeal upheld a decision of the High Court ([2005] BTC 253) to reverse the special commissioners’ finding that a company was resident in the UK on the basis of the central management and control test.

Facts

A sophisticated scheme was devised on behalf of the taxpayers (a husband and wife) to avoid capital gains tax on the disposal in July 1996 of shares originally held by the taxpayers in a business built up by the husband. The appeals concerned the liability of the taxpayers as settlors to capital gains tax under TCGA 1992, s. 86 in respect of gains treated as accruing to a number of non-resident settlements on the sale of shares which had been gifted by the taxpayers to a British Virgin Islands company, ‘C Ltd’, formed by the trustees of the settlements, and transferred by that company to a Dutch subsidiary, ‘EBV’, the gains being attributed to the trustees under s. 13. The dispute concerned the applicability of s. 171. The taxpayers contended that both C Ltd and EBV were nonresident with the result that under s. 171, which applied by reason of s. 14, no gain accrued on the disposal. The Revenue contended that s. 171 did not apply because the central management and control of EBV was in the UK being exercised by the husband or on his behalf, whereas C Ltd was not resident in the UK. It was common ground that if s. 171 did not apply, the gain on the disposal of shares by C Ltd was assessable on the taxpayers by reason of the combinedeffect of s. 13 and s. 86 and Sch. 5, para. 1(3) of TCGA 1992.

The special commissioners dismissed the taxpayer's appeal ((2004) Sp C 422) holding that EBV was not nonresident at the relevant time. The taxpayers appealed successfully to the High Court, Park J holding that, on a proper application of the law to the facts, the only tenable conclusion for the special commissioners to have reached was that under the common law of corporate residence EBV was resident in the Netherlands at the relevant time ([2005] BTC 253).

The Revenue appealed to the Court of Appeal arguing that the judge had not been entitled to interfere with the decision of the special commissioners as to EBV's residence because the only basis on which he could properly interfere was that the only true and reasonable conclusion was the opposite of that to which the commissioners came and that, even if another tribunal might properly have come to a different decision, the special commissioners’ decision was not open to reversal on that ground.

Issues

Whether the judge had been entitled to interfere with the special commissioners’ decision and where EBV was resident.

Decision

The Court of Appeal (Chadwick LJ, Moore-Bick LJ and Sir Christopher Staughton agreeing) said that 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 UK lay, it was essential to recognise the distinction between cases where management and control of the company was exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs were ‘usurped’ – in the sense that management and control was exercised independently of, or without regard to, those constitutional organs.

The Revenue had produced no positive material to show where the central control and management of EBV was. It was not enough for the Revenue to criticise the lack of evidence from some of those who had been involved in the 1996 transaction. Nor was it enough to demonstrate that the steps taken were part of a single tax scheme and that those involved all shared the common expectation that the various stages of the scheme would in fact take place. It was clear that the judge was well aware of the limitations imposed on his jurisdiction by TMA 1970, s. 56A; and of the guidance given by the House of Lords in Edwards v Bairstow [1956] AC 14. On a proper application of the law to the facts the only correct conclusion was that EBV was resident in the Netherlands. It could not be said that the judge usurped the fact-finding role which the legislature had entrusted to the special commissioners. The sole director of EBV was a trust, which was part of a well-known Netherlands banking and financial group. The trust had entered into the agreement to buy the shares from C Ltd, and into the later agreement to sell the shares. Those decisions were taken in Amsterdam.

The legal flaw in the special commissioners’ approach was to treat the decision that was made by the managing director of EBV as if it were not an ‘effective decision’ by a constitutional organ exercising management and control because it was the only decision. There was nothing else to manage. Further the commissioners had treated the decisions which were made by the managing director as not effective on the basis that they were reached without proper information or consideration. But a management decision did not cease to be a management decision because it might have been taken on fuller information.

Whether EBV was resident in the UK was not a question of fact in this case. The available facts were sufficient to enable the judge to decide whether, in law, EBV was resident in the UK. The only answer was that it was in the Netherlands. There might have been further facts; and if they had been proved, they might have contradicted the facts previously established. As it was, the facts that were proved showed that EBV was resident in the Netherlands.

Court of Appeal (Civil Division). Judgment delivered 26 January 2006.