Upper Tribunal guidance on ‘Place of Effective Management’

The Upper Tribunal has handed down its decision in Haworth & Ors v HMRC [2024] UKUT 00058 (TCC). In the latest case concerned with the ‘Round the World’ scheme, the UT considered the correct approach to the ‘place of effective management’ (‘POEM’) test, which is used to determine where a person other than an individual is resident in many double tax agreements (‘DTAs’).

The scheme involved the migration of trusts pregnant with capital gains to Mauritius through the appointment of Mauritian trustees. It was anticipated that the trustees would dispose of the trusts’ shareholdings, and subsequently UK-resident trustees would be appointed within the same tax year. The purpose of the scheme was to take advantage of the fact that Mauritius does not impose a relevant form of capital gains tax, by claiming that the relevant trusts were resident in Mauritius rather than the UK under the UK-Mauritius DTA. The FTT found that POEM of the relevant trusts was in the UK rather than Mauritius such that the UK was entitled to impose capital gains tax.

The appellants appealed to the UT on the basis that the FTT had misunderstood the correct test for POEM. They argued that test to determine POEM is the same as the test to determine the central management and control (‘CMC’) of a company. By reference to the judgement of the Court of Appeal in Wood v Holden, they argued that the FTT had not been entitled to find that POEM was in the UK, because it had failed to find that the functions of the Mauritius trustees had been ‘usurped’.

In rejecting the appeal, the UT considered in detail the reasoning of the leading case on POEM, HMRC v Smallwood & Ors. The UT concluded that the Special Commissioners in Smallwood had not applied a test of usurpation and that in upholding that decision, the majority of the Court of Appeal had neither endorsed nor applied such a test.  The correct approach to determine the POEM of a trust is to ask, as the Special Commissioners did in Smallwood, “in which state the real top level management (or realistic, positive management) of the trustee qua trustee is found”. The UT decided that that was the test applied by the FTT and therefore it had made no error of law.

Chris Stone and Hitesh Dhorajiwala were instructed by HMRC. Timothy Brennan had led Chris Stone in the FTT. 

The decision can be found in full here.

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