Company tax residence: an important update

17 December 2020

Let us consider an example.

  • A UK group devises a transaction that requires the participation of Jersey-based subsidiaries to achieve its intended tax result.
  • In Jersey, the directors of the subsidiaries hold board meetings to approve the transaction. The directors are influenced by the wishes of the UK parent company, but equally they know what they are being asked to decide and understand their duties as directors. 

For tax purposes, where are these subsidiaries resident - Jersey or the UK?

This is the underlying dispute in the Development Securities litigation, on which the Court of Appeal has just published its decision.

Since the first court decision on these facts in August 2017, there has been considerable interest from tax professionals in whether this case will change the approach of the courts or HMRC in establishing company residence in the UK.

My previous update on this case dealt with the Upper Tribunal decision. At that stage, HMRC was unsuccessful and many advisers took comfort that the long-established test for corporate residence had been applied in the way the taxpayers expected.

The Court of Appeal has now reversed that outcome.

However, unlike the lower courts, the Court of Appeal has decided the case on fairly narrow and procedural grounds. So the opportunity to clarify the law in the context of the above example has been missed, at least for now.

It is not clear whether a majority in the Court of Appeal thought that the Jersey subsidiaries should be treated as UK resident. There are three judgments. One suggests that the First-tier Tribunal was right to find that the subsidiaries were UK tax resident, one takes the opposite view, and the third deals with the issues without indicating an answer one way or the other. 

If there is a simple lesson in all of this it is that it is difficult to re-litigate heavily fact-dependent decisions in the higher courts. HMRC won at first instance (where the facts were reviewed in detail) and after the Court of Appeal decision that remains the outcome. 

On the wider question - if the legal test for company residence is to evolve - that will now depend on whether the Supreme Court chooses to hear a further appeal.  

the issue of the residence of Jersey companies for UK tax purposes was "an essentially factual enquiry as to who makes the strategic and management decisions regarding the company's business and where those decisions are made."