Development Securities – U.K. Upper Tribunal finds that the for-hire directors of a Jersey sub exercised central management and control there

A U.K. tax avoidance scheme, entailed Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that such subsidiaries had their central management and control (CMC) in Jersey at the time of the acquisitions. The subsidiaries’ directors consisted of three Jersey-resident “professional directors” (working for a Jersey firm associated with a Jersey law firm) and the UK-resident company secretary of DS Plc (Mr Lanes). This board met five times to address the transactions in detail, before the resignations occurred.

Before reversing the finding below that the Jersey subsidiaries were not resident in Jersey prior to the resignations, the Tribunal stated:

The mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent does not mean that central management and control vests in the parent.

… Where a parent company merely “influences” the subsidiary, CMC remains with the board of the subsidiary. It is only where the parent company “controls” the subsidiary, i.e. by taking the decisions which should properly be taken by the subsidiary’s board of directors, that CMC vests in the parent. …

[W]hatever the position as regards Mr Lanes (who may have been prepared to carry out the transactions no matter what), the Jersey directors (i) knew exactly what they were being asked to decide; (ii) did so understanding their duties; and (iii) complied with those duties.

Neal Armstrong. Summary of Development Securities PLC and Others v The Commissioners for HM Revenue and Customs (Tax) [2019] UKUT 169 (Tax and Chancery Chamber) under s. 2(1).