Court of Appeal clarifies interpretation of ‘place of effective management’

It follows a dispute centred around capital gains tax (CGT) liabilities. In this case, the Court of Appeal rejected claims by Geoffrey Haworth, Ian Lenagan, and SG Kleinwort Hambros Trust Company (UK) Ltd (SGKH) that their trusts were tax resident in Mauritius at the time of a lucrative share disposal in 2000.

“This decision, while not surprising, is a welcome confirmation of how the residence of trusts it to be determined,” said Jake Landman, tax expert at Pinsent Masons.

The case centred on the interpretation of place of effective management (POEM) under the UK-Mauritius Double Taxation Treaty. It was argued that the trusts were managed from Mauritius during the relevant period, and thus not liable for UK CGT. However, the court found that the real strategic control remained in the UK, rendering the trusts UK tax resident.

In early 2000, a family trust established by Haworth held shares in TeleWare plc, while two trusts founded by Lenagan held shared in WorkPlace Group Limited. Plans were underway to merge the two companies and list the new entity, TeleWork Group plc, on the London Stock Exchange. Advised by tax counsel, the trustees implemented a scheme temporarily appointing Mauritian trustees just before the share disposals. The UK trustees were to be reinstated later in the same tax year. This arrangement, known as a “round the world” scheme, aimed to exploit the treaty’s provisions to avoid tax altogether, as Mauritius did not levy CGT.

The merger proceeded, and by 3 August 2000, Telework was floated. The trusts disposed of most of their shares. By 24 October 2000, the Mauritian trustees resigned, and the UK based trustees resumed control. HM Revenue and Customs (HMRC) subsequently amended the 2000/2001 tax returns, imposing CGT on the gains. The assessments were challenged on appeal but both the First-tier Tribunal (FTT) and Upper Tribunal (UT) upheld HMRC’s position.

It was argued that the FTT had misapplied the POEM test. The taxpayers argued that the correct standard was the “usurpation” test established in Wood v Holden, which focuses on whether decision-making authority was overtaken by an external party, in the context of considering the central management and control (CMC) of a corporate entity. They claimed that the Mauritian trustees genuinely directed the trusts during the disposal period.

However, the UT previously rejected this argument, affirming the Smallwood approach, which defines POEM as the location of “realistic positive management”. The Tribunal found that the Mauritian trustees were merely executing a pre-determined plan devised in the UK.

The Court of Appeal agreed. It emphasised that POEM is not about where administrative tasks are performed or where documents are signed, but where genuine, high-level strategic decisions are made. For instance, the court noted that formalities, such as operating a bank account, are insufficient to establish POEM.

The ruling reinforces HMRC’s stance against artificial tax avoidance schemes and provides important clarification on the interpretation of POEM in the context of double taxation treaties. It underscores the principle that substance prevails over form in determining tax residency.

In discussing why the Wood v Holden approach to residency is not appropriate in the context of trust residence under a double tax treaty, the court considered both the specific treaty and the OECD materials. It noted that “the concept of CMC is not well-suited to perform the function of POEM. Both the [OECD] Model Convention and the Treaty proceed on the basis that there will be only one POEM at a point in time."

Landman said: “While not surprising, the confirmation that the residence of trusts is to be determined using the separate principles espoused in Smallwood, and not using the approach adopted in Wood v Holden, in relation to the central management and control of a corporate entity, is welcome. This decision reinforces the need for trustees toensure that decision-making is genuinely independent, and to maintain documentation of substantive management activities to support residency claims in cross-border trust arrangements.”