In Haworth v HMRC [2025] EWCA Civ 822, the Court of Appeal (the Court) has delivered its decision in a tax dispute that began over two decades ago, involving a widely marketed tax scheme at the time, known as a “round the world” scheme, which was designed to avoid UK capital gains tax (CGT).

We have previously written about the decisions in the First-tier Tribunal (FTT) and the Upper Tribunal (UT).

Background

The Jersey trustees of a family trust held shares in a UK-incorporated company. At the beginning of the trust’s circular journey, the Jersey trustees resigned in favour of trustees resident in Mauritius. The Mauritian trustees then sold the shares and, after the sale, the Mauritian trustees resigned in favour of UK-resident trustees, thereby bringing the residence of the trust back “round the world”. The intention was that, at the time when the shares were sold, the trust would be resident in a jurisdiction (Mauritius) that does not tax capital gains.

The scheme took advantage of the UK-Mauritius Double Tax Treaty (the Treaty), which contains a “tie-breaker” test for determining the treaty residence of an entity that is liable to tax in both contracting states. The effect of the test was that the trust would be deemed to be a resident of the contracting state in which its “place of effective management” (POEM) was situated.

If the POEM was found to be in the UK, then the trust would be liable to CGT on the disposal of the shares. If it was in Mauritius, then no tax would be due.

What is “place of effective management”?

The test for POEM was derived from the Court's decision 15 years earlier in a case involving a similar round the world scheme: Smallwood v Revenue and Customs Comrs [2010] EWCA Civ 778 (Smallwood). The leading judgment in that case held that the POEM should be interpreted as the place where the “realistic, positive management” happened, considering the decisions of the trustees as a continuing body. This could be distinct from the day-to-day management of the trustees in office at the time, which meant that it was possible to consider any overarching scheme in place for the wider management of the trust.

The dissenting judgment said that the test should be applied to a corporate trustee in the same way as the well-known Central Management and Control test (CMC) as derived from the case of Wood v Holden [2006] EWCA Civ 26. This would involve looking at where the binding decisions are made by the relevant constitutional organs, unless the decision-making has been “usurped”.

The decision in Smallwood therefore left room for uncertainty over how, if at all, the POEM and CMC tests interacted. Adding to the uncertainty were comments from Holden J in Wood v Holden that, on the facts of that case, the tests would have essentially been the same.

The key remaining question for the Court in Haworth was whether these tests are to be approached in the same way, or were they different?

The Tribunal decisions: FTT and UT

The FTT questioned the approach of the majority in Smallwood but considered it to be binding. Applying the reasoning in Smallwood, the FTT found that the trust was effectively managed in the UK at the relevant times, even though the trustees were resident in Mauritius, by reference to the place of “top-level” management. There was no question that the Mauritian trustees actually entered into the transactions to dispose of the shares, but the FTT found that the UK settlors of the trust and their UK advisors “devised, decided upon, facilitated, orchestrated and superintended” the scheme “on an ongoing basis through the relevant period”.

The appeal to the UT turned solely on this question of how the POEM test was to be interpreted. The appellants argued that the FTT were wrong to find that the Court in Smallwood was applying a different test from that in Wood v Holden. The correct interpretation of the decision in Smallwood had to be the focus because, whatever was decided, it would be binding on the UT. 

In short, the UT found that the majority in Smallwood had endorsed a test for POEM which involved looking at the circumstances in which the scheme was devised and implemented. It was not necessary to consider the test for CMC or whether the decision-making of the Mauritian trustees had been “usurped”. As a result, the FTT had applied the correct test and had been bound to do so.

The Court of Appeal’s decision

As was the case in the UT, the only question before the Court was the interpretation of the POEM test and how it was to be reconciled with the CMC test, if at all. Again, this required the Court to focus on the approach taken in Smallwood.

As a starting point, the Court observed that other states cannot be taken to have adopted the concept of CMC, which is derived from UK case law and concepts regarding corporate residence. This suggests that CMC must be a different test to the one set out in any international treaty. Accordingly, when looking at the POEM of an entity, it would not be appropriate to apply reasoning based on “central management and control”.

The Court also looked at the commentary on the OECD’s Model Convention and on the Treaty to make the point that the concept of CMC is not well-suited to perform the function of a tie-breaker. The Treaty proceeds on the basis that there can only be one POEM at any time. The Court considered that the CMC test, by contrast, does not always produce a single answer and that this is clear from the case law. The purpose of the POEM test under a treaty would be frustrated if it is possible to arrive at more than one answer.

The Court endorsed the reference to “realistic, positive” management adopted in the Smallwood decision and said that, while a company’s CMC will be located where its constitutional organs make its decisions, when considering the location of realistic positive management, it was necessary to consider the position more broadly. In particular, the POEM could not be determined solely by reference to the circumstances in place at the moment of the disposal but must take into account any overarching scheme of management.

Looking at the facts, the Court agreed with the FTT that the trustees in Mauritius were following a pre-determined, single plan set out by the settlors in the UK. The Mauritian trustees were ”playing their parts in a script which had been written by others”.

As a result, the Court found that the FTT did not err in its application of the test in Smallwood and were right to have no regard to the CMC test when considering the POEM of the corporate trustees under the Treaty.

What does this mean going forward?

The Court’s decision in Haworth provides a clear confirmation that the POEM test in treaties is distinct from the UK’s CMC test for corporate residence. The POEM test looks at where the overall management happens, not just where the trustees are resident at any one time. In some cases, the answer to both tests may be the same, but in other cases it will differ. 

While these “round the world” schemes are no longer in common usage and the arrangements were undoubtedly artificial, the decision demonstrates that the impact of a third party or an “overarching plan” can be relevant when considering the residence position of a trust or corporate entity. It is obviously very common for entities to be formed for particular purposes or for them to follow the wishes of their parent company. It would be surprising if such arrangements in themselves cast doubt on where management was located. 

It is possible that the case will be appealed to the Supreme Court, which would not be bound by the approach in Smallwood.