Haworth v HMRC - Introduction
The Upper Tribunal in Haworth v HMRC [2024] UKUT 00058 (TCC) upheld the interpretation of the "place of effective management" test for determining tax treaty residence, confirming that it is distinct from the "central management and control" test used to ascertain corporate residence.
The case revolved around a complex tax avoidance scheme involving corporate trustees and double tax treaties.
Background of the Scheme
The case involved Jersey-based trustees of a family trust that held shares in a UK-incorporated company.
The trustees participated in a "round the world" tax avoidance scheme designed to avoid UK capital gains tax on a share disposal.
The scheme involved resigning UK trustees in favor of Mauritian trustees to dispose of shares, taking advantage of the UK-Mauritius Double Tax Treaty.
Article 4(3) of the Treaty provided a tie-breaker test for determining the residence of a person liable to tax in both contracting states, with the deciding factor being the "place of effective management."
The trustees in Mauritius, who would not incur UK capital gains tax on the disposal, replaced the existing Jersey trustees.
The newly appointed trustees then disposed of shares, following which UK-resident trustees were reappointed. HMRC contended that the scheme was fraudulent, as the commercial reality pointed to the effective management being in the UK, negating the tax benefits claimed.
The Test for "Place of Effective Management
The First-tier Tribunal (FTT) applied the test for the "place of effective management," which required considering the centre of top-level management.
It found that the trustees in the UK, along with their advisors, orchestrated and supervised the tax avoidance scheme, suggesting that the management of the trust effectively rested in the UK.
On appeal, the Upper Tribunal confirmed that the test used to determine the place of effective management differed from the central management and control test used to ascertain corporate residence.
The "top-level management" approach requires assessing where key management and commercial decisions are made, not just the location of individual trustees.
The appellants argued that the test for the place of effective management should be aligned with the central management and control test, emphasizing that the Mauritian trustees made the final decisions regarding the disposal of shares.
However, the Upper Tribunal upheld the FTT's interpretation that the test should consider the broader circumstances, including the planning and implementation of the scheme.
The fact that certain decisions were taken in the UK and that the trustees acted under external influence was sufficient to challenge the notion of effective management in Mauritius.
Implications of the Decision
The Upper Tribunal's decision reinforces that the place of effective management test is distinct from the central management and control test.
This interpretation carries significant implications for international tax planning, as it suggests that assessing the "effective management" must consider the overall context and not just isolated decisions by trustees or corporate entities.
The ruling provides clarity on the application of the "place of effective management" test in double tax treaties, indicating that it should be interpreted with a broader perspective.
This decision could impact cross-border tax planning and the structure of trusts where treaty residence plays a critical role in tax liability.
This decision may also lead to greater scrutiny in tax avoidance schemes that rely on offshore entities to avoid UK tax liabilities.
Future cases involving the interpretation of double tax treaties will likely refer to this decision, emphasizing the importance of considering the context in which tax decisions are made.
Haworth v HMRC - Conclusion
It remains to be seen whether the case will be appealed to the Court of Appeal, which could lead to further clarification or modification of the established interpretation of the "place of effective management."
If the Court of Appeal chooses to address the case, it could potentially depart from the decision in Smallwood, leading to a broader interpretation of tax treaty residence.
Final thoughts
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