Court of Appeal Guidance on ‘Place of Effective Management’
The Court of Appeal has handed down its decision in Haworth & Ors v HMRC [2025] EWC Civ 822, in the latest instalment of litigation concerning the ‘Round the World’ scheme. Following a decision from the Upper Tribunal ([2024] UKUT 0058), the taxpayers appealed to the Court of Appeal on the correct approach to determine the place of effective management (‘POEM’) test. POEM is used as a tie-breaker in many double tax agreements (‘DTAs’), to decide in which of two states a person other than an individual is resident. The background to this appeal is set out in an earlier piece.
The appellants contended, as they did before the First-tier Tribunal and Upper Tribunal that the correct test for POEM was the same as the test for central management and control (‘CMC’) of a company, as applied in Wood v Holden. They said that, in accordance with that test, the FTT could only have found that POEM was in the UK if there had been usurpation or dictation of the decision-making functions of the trustees resident for a short time in Mauritius.
The previous leading case on POEM was the judgment of the Court of Appeal in HMRC v Smallwood. The arguments in this appeal explored the reasoning of the Special Commissioners and the majority of the Court of Appeal in Smallwood, issues of treaty interpretation, and the test for CMC.
The appellants argued that the Court of Appeal in Smallwood was not binding authority on the test for POEM, and the Wood v Holden approach provided a test of greater clarity and certainty.
Rejecting the appeal, the Court of Appeal (judgment given by Lord Justice Newey, with whom Sir Andrew McFarlane and Lord Justice Arnold agreed) distinguished between the functions served by POEM and CMC. POEM is a tie-breaker used in DTAs to resolve situations in which a person is resident in both countries to the DTA. It must, for the DTA to properly function, be capable of resolving such that there is only one country of residence for the purposes of the treaty. It has an autonomous treaty meaning. In contrast, CMC was “not designed to serve the same purpose as POEM and may not yield the single answer which POEM needs to supply”; a company may have its CMC in two states at the same time.
Accordingly, the test of POEM demands a broader factual inquiry beyond whether decision-making functions had simply been ‘usurped’ or ‘dictated’. This understanding of POEM was held to be consistent with, and supported by, the Court of Appeal’s decision in Smallwood. The Court of Appeal therefore held that the FTT had not erred when deciding that POEM should not be determined by reference to Wood v Holden principles.
Christopher Stone KC and Hitesh Dhorajiwala were instructed by HMRC. Timothy Brennan had led Christopher Stone in the FTT.
The decision can be found in full here.
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