SPC00422

Capital gains tax – Residence of companies – Inter-group disposal – Whether both companies resident or both non-resident – Settlements – Gifts to company owned by non-resident trustees – Gains held over – Disposal by company incorporated overseas to subsidiary – Settlors assessed on gain – Whether no gain no loss on inter-group disposal – Central management and control – Anglo-Dutch DTR agreement Art 4(3) - _Place of effective management – TCGA 1992, ss 13, 14(2), 86, 171(1), Sch 5 para 1(3) – Appeals dismissed

THE SPECIAL COMMISSIONERS

	Mr R	Appellant

	- and -

	MRS L M HOLDEN
	(HM INSPECTOR OF TAXES)	Respondent

	Mrs R	Appellant

	- and -

	MRS L M HOLDEN
	(HM INSPECTOR OF TAXES)	Respondent

		Special Commissioners:	THEODORE WALLACE
						DR NUALA BRICE

Sitting in private in London on 1-5 December 2003

John Tallon QC, instructed by a firm of chartered accountants, for the Appellants

Timothy Brennan QC, instructed by the Solicitor of Inland Revenue, for the Respondents

© CROWN COPYRIGHT 2004
ANONYMIZED DECISION

1.	These appeals arise out of a sophisticated scheme devised on behalf of the Appellants to avoid capital gains tax on the disposal in July 1996 of shares originally held by the Appellants in a business built up by Mr R.  The notice of appeal to the Inland Revenue was on 13 November 2001 against closure notices and assessments dated 17 October 2001 following notices of enquiry on 27 January 1999.  Notice of hearing was served on the Special Commissioners by the Appellants on 30 May 2002.

2.	The appeals concern the liability of the Appellants as settlors to capital gains tax under section 86 of the Taxation of Chargeable Gains Act 1992 in respect of gains treated as accruing to a number of non-resident settlements on the sale of shares which had been given by the Appellants to C Ltd, a company formed by the trustees of the settlements, and transferred by that company to E BV, the gains being attributed to the trustees under section 13.

3.	The dispute concerns the applicability of section 171.   Mr Tallon contended that both C Ltd (“C Ltd”) and E BV (“E BV”) were non-resident with the result that under section 171, which applied by reason of section 14, no gain accrued on the disposal. The primary dispute concerned the residence of E BV, which was incorporated in the Netherlands and was a wholly-owned subsidiary of C Ltd which was registered in the British Virgin Islands.

4.	Mr Tallon’s alternative contention was that if E BV was resident in the United Kingdom then C Ltd was also resident in the United Kingdom.

5.	Mr Brennan contended that section 171 did not apply because on a proper analysis of the facts the central management and control of E BV was in the United Kingdom being exercised by Mr R or on his behalf and there was no evidence that C Ltd was resident in the United Kingdom.

6.	The capital gains tax on the gifts by the Appellants had been held over.  Mr R was assessed under section 86 to £11,149,600 tax on a gain of £27,874,000.  Mrs R was assessed to £1,167,881 on a gain of £2,919,700.  The appeal hearing was concerned with the issue of liability rather than quantum.

7.	It was common ground that if section 171 did not apply the gain on the disposal of shares by C Ltd was assessable on the Appellants by reason of the combined effect of sections 13 and 86 and Schedule 5, paragraph 1(3) of the Taxation of Chargeable Gains Act 1992.

8.	At the relevant time section 171(1) provided as follows:

“(1)	… where a member of a group of companies disposes of an asset to another member of the group, both members shall … be treated … as if the asset … were acquired for a consideration of such amount as would secure that on the other’s disposal neither a gain nor a loss would accrue to that other …”
Under section 170(2)(a) it is provided that, except as otherwise provided, references to a company in section 171 apply only to companies resident in the United Kingdom.  Section 14(2) provides,

“(2)	Sections 171 … shall apply in relation to non-resident companies which are members of a non-resident group of companies, as they apply in relation to companies resident in the United Kingdom which are members of a group of companies.”

The evidence

9.	The following Statement of Agreed Facts was agreed prior to the hearing:

“1.	[GC Ltd] was a trading company operating the [Group Ltd] chain of card shops.  [Mr and Mrs R] held 380,920 and 40,000 ordinary shares respectively in the company. These shares formed approximately 96% of the ordinary share capital.  Other shares were held by a number of employees and a personal acquaintance of [Mr R], [Mr B].

2.	On 27 March 1995 [Mr and Mrs R] engaged [a firm of chartered accountants’ Corporate Finance department] to locate a buyer for the company.

3.	On 18 October 1995 [Mr and Mrs R] set up a number of settlements (the [Mr R] Family Settlements Nos 1-8 the [Mrs R] Settlements Nos 1-2 and the [Mr R] Discretionary Settlement).  The amount settled on each trust was £1,000.  Apart from the Discretionary Settlement, either [Mr or Mrs R] had a life interest in each settlement.  The trustee of the 10 life interest settlements was [A Trustees (BVI) Limited] (which changed its name on 6 March 1996 to [Z Private Trust (BVI) Limited)] a wholly owned subsidiary of [Z], who were based in Geneva.  [Z] was the trustee of the Discretionary Settlement.

4.	On 13 October 1995 the trustees of the above settlements incorporated [C Ltd, a company registered in the British Virgin Islands.  The share capital was split into A shares which were held by the interest in possession settlements and B shares which were held by the discretionary settlement.  The B shares carried all the rights to the assets of [C Ltd] in the event of a winding up.

5.	[GC Holdings Ltd] (formerly [V Limited]) was formed as an off the shelf company on 22 September 1995.  The company had an authorised share capital of 100,000 £0.01 ordinary shares.  [Mr R] acquired 200 £0.01 ordinary shares on 24 October 1995.  A further 90,297 of these shares were allotted to [Mr R] and the remaining 9,503 shares allotted to [Mrs R] on 24 October 1995 for cash.

6.	On 24 October 1995 [Mr and Mrs R] gifted 45,248 and 4,751 shares respectively in [Holdings] to C Ltd.

7.	On 26 October 1995, [Mr & Mrs R gifted] 380,920 and 40,000 shares respectively in [GC Ltd] to [Holdings].  The chargeable gains arising on the transfers of the shares to [Holdings] were held over under s.165 TCGA 1992.

8.	On 27 October 1995, [Mr & Mrs R] gifted 4,525 and 475 shares respectively in [Holdings] to [The R Children’s Trust], a UK resident accumulation and maintenance trust established for the benefit of the children of [Mr R], being [SJR] (date of birth 17 April 1976) and [SRR] (date of birth 19 November 1978).  The chargeable gain arising on the transfers into the trust were held over under s.165 TCGA 1992.

9.	[C Ltd] purchased from [A BV], a subsidiary of the [Trust Company Bank NV], on 18 July 1996 all the shares in a dormant Dutch incorporated company [E Holding BV].   [Trust Company] was appointed as sole managing director of [E BV] and took an indemnity from [Z].

10.	On 23 July 1996 C Ltd disposed of its shareholding in [Holdings] to [E BV] for £23.7 million plus, in the event of a sale within 3 years in excess of that amount, 95% of such excess.  A group structure diagram as at August 1996 [was] attached.

11.	On 21 October 1996 [E BV] sold its shares in [Holdings] to [Group Limited] for £30,799,384.  The other shareholders (both in [Holdings] and the minority shareholders in [GC Ltd]) also sold their shares simultaneously.

12.	The following statement (the correctness of which is disputed by the Inland Revenue) was made by way of additional disclosure in the capital gains tax section of the income tax returns of [Mr & Mrs R] for the year ended 5 April 1997.

‘During the year [C Ltd], the BVI company owned by [The R family settlements 1-8] and [Mrs R Family Settlements 1&2] acquired a Dutch incorporated and resident company [ E BV] and sold its [Holdings] shares to [E BV] in exchange for debt.  [E BV] subsequently disposed of the [Holdings] shares making a gain which, if it were to be calculated in accordance with UK CGT principles, would amount to around £30,800,000.  The entire share capital of [Holdings] was purchased at this time by a third party.

I believe that the disposal of shares in [E BV] does not result in a charge to capital gains tax arising on me by virtue of s 13 TCGA 1992 and/or s 86 TCGA 1992 as [E BV’s] gains are within the charge to Dutch tax (calculated by reference to their principles) and Article 13 of the Anglo/Dutch taxation treaty provides for gains from such property to be taxable in the state where the person making the disposal is resident.’”

The diagram referred to at paragraph 10 of the agreed Statement showed [C Ltd] as owning all the shares in [E BV] which in turn held 49.99 per cent of the shares in [Holdings].  [Mr R] held 40.724 per cent of the shares in [Holdings], [Mrs R] held 4.277 per cent and a trust for their children held 5 per cent.  [Holdings] held 96.24 per cent of the shares in [GC Ltd] with [Mr B] holding 1.86 per cent and five other shareholders holding 0.38 per cent each.  [GC Ltd] had five wholly-owned subsidiaries.

10.	Oral evidence was given by four witnesses:

Witness 1, chartered accountant, who was at the time a partner in the firm of chartered accountants and head of the North West Corporate Finance team;

Witness 2, senior trust manager at Z (Suisse) SA;

Witness 3, solicitor, partner in the firm of solicitors; and 

Witness 4, a partner of the firm of chartered accountants. 

11.	A statement by Nyree Victoria Lane, legal officer, employed in the office of the Solicitor of Inland Revenue, was agreed.

12.	A statement by Mr W, of Dutch Trust Company, who was unfit to attend, was not agreed by the Respondent but was admitted in evidence under regulation 17(5) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. This is subject to the weight to be given to it.

13.	There was a substantial bundle of documents primarily produced by the Appellants but including material obtained by the Respondent from third parties under section 20 notices.

14.	In addition to the Agreed Facts, we find the following primary facts.

15.	The engagement letter of 27 March 1995 was signed by the two Appellants and followed a meeting between Witness 1, who was head of the North West Corporate Finance team of the firm of chartered accountants, and Mr R who was exploring the market with a view to sale.  Profit after tax of GC Ltd was estimated at £7.31 million for 1994/95 and £10.72 million for 1995/96.  Sale of all the shares including those held by staff was envisaged.  Because the business had been built up by Mr R there was a very large contingent liability to capital gains tax on the Appellants’ shares.

16.	The possibility of the transfer of shares owned by the Appellants into trust prior to sale was envisaged in the engagement letter which included the following,

“To the extent that any of your shares are transferred into trust prior to the sale, it is agreed that they will be transferred subject to this letter of engagement.”  

Arrangements for tax planning were the subject of a separate letter of engagement from Witness 4 which was not exhibited.

17.	Witness 1’s letter included the following,

“We will manage negotiations and advise you on the relative merits of the final offers.  During this latter phase, we will assist you in structuring the proposed transaction and in any further negotiations which may be required.

During the final phase of the transaction we will act as the co-ordinating point for you, the purchaser and their respective lawyers to ensure matters are brought to a swift conclusion. This phase of the assignment will include review of contractual documentation and final documentation of tax planning.”

18.	Fees were on a sliding scale, with 0.75 per cent up to £100 million as a success fee with a documentation fee and retainer of £75,000 to be deducted.  Initially completion was planned for April 1996 in the new tax year.

19.	While Witness 1’s team was preparing material and researching potential purchasers, Witness 4 met Mr R on a number of occasions to discuss tax planning.

20.	On 11 August 1995 following a meeting Witness 4 wrote a letter of eleven pages including schedules to Mr R confirming details of an off-shore structure under which the Appellants would give their shares in GC Ltd to a new UK resident company in which they would be the only shareholders and they would then give 49.9 per cent of the shares in that new company to a new non-resident company, the shares in which were to be held by the trustees of non-resident settlements established by the Appellants.  The gain on the gift of the GC Ltd shares would be held-over and no immediate charge to tax would arise on the sale by the non-resident company of shares in the new UK company.

21.	Witness 4’s letter contained a number of other proposals in respect of the trusts and the shares in the new UK company to be retained.

 22.	The firm of chartered accountants’ charges in respect of the off-shore structure were agreed at £10,000 once the structure was in place and a further £20,000 on sale of the business to an independent third party; legal fees would be extra but should not exceed £3,000 for the off-shore structure.  Witness 4 suggested Z (Suisse) as trustees and as directors of the non-resident company and wrote that their fees were normally £2,500 to set up the structure and £2,500 annually.

23.	These proposals were duly implemented : see paragraphs 3 to 7 of the Agreed Facts.

24.	On 19 October 1995 Z Private Bank & Trust (BVI) Ltd, the sole subscriber to C Ltd, appointed X Nominees Ltd (“X Ltd”), a company incorporated in the British Virgin Islands, as sole director of C Ltd.  X Ltd resolved that the shares in C Ltd be issued to the trustees of the eleven settlements.  X Ltd resolved that Z (Suisse) S.A. be appointed to provide Corporate Management Services with fees commensurate with the work but not less than 5,000 Swiss francs per annum; Z Bank (Suisse) S.A. were appointed as bankers.  A resolution took notice of the fact that X Ltd was “controlled by Z (Suisse) S.A. and/or Z Bank (Suisse) S.A. and/or Z Bank PLC and/or their subsidiaries or associated companies.”  It was resolved that the administrative office of C Ltd be x, x, Geneva.   That was also the address of Z (Suisse).

25.	On 24 October 1995 a series of events occurred.  The Appellants sent share certificates in Holdings and transfers by way of gift to C Ltd at Tortola, British Virgin Islands.  X Ltd, having tabled letters of gift, resolved to accept them.  On the same day X Ltd sent the certificates and transfers back to the directors of Holdings, who were the Appellants, at the address in Rugby of the solicitors who had prepared the settlements.  Again on the same day the Appellants as directors of Holdings resolved to approve the transfers and wrote to C Ltd at Tortola enclosing the new share certificates.  The result was that C Ltd held 49,999 of the 100,000 shares in Holdings.  It is not clear how all of this could have happened on the same day, however it was agreed (paragraph 6 of the Agreed Facts) that the gift of the shares was on 24 October.

26.	Meanwhile Witness 1’s team were seeking buyers for the business.  Four indicative offers were received by Christmas 1995.  One of these was from MV Ltd and NV (together referred to as “MNV”) envisaging acquisition by a newly formed venture capital company; they wished to build on the strengths of the existing management and welcomed continued investment by Mr R.  Their indicative offer of £90-100 million assumed an operating profit of £14.5 million in the year to June 1996.  The ongoing commitment of key management was viewed as critical.

27.	Although trading over Christmas 1995 was disappointing, MNV showed continuing interest.  Mr R and his managers made a presentation on 19 January 1996. Following a further visit to GC Ltd a memorandum headed “Re Project Marvel” dated 12 March 1996 by MNV stated that Mr R was genuinely undecided about selling and had no firm personal plans.  The memorandum stated, “The business has outgrown his management style but he is loath to let go.  It probably requires a firm offer to flush him out.”  Later it stated, “The value of the business is unclear.”

28.	On 20 March 1996 MNV made an offer subject to contract to the firm of chartered accountants of £85 million, comprising £80 million plus £5 million corporation tax for the current year, on the basis of the selling shareholders re-investing in a 20 per cent share of the institutional investment in loan stock and equity; Mr R would be offered a consultancy agreement; key managers and directors would enter into service agreements.  The offer was based on an operating profit of £13 million to June 1996 and was reduced to £75.2 million on 26 April following a reduced operating profit forecast of £11 million.  

29.	The offer was further modified on 15 May 1996 to £72 million on the basis of the existing shareholders reinvesting one third of the institutional investment and receiving 28.3 per cent of the equity in the new company which was to take over the business and £14.566 million in 15 per cent loan stock; the offer was for 100 per cent of the business.

30.	By 16 April 1996 it was intended that a Dutch holding company should be inserted into the off-shore structure (see paragraph 32) and Dutch Trust Company had stated the terms on which it would act.  Following a meeting with Mr S at the firm of chartered accountants’ Corporate Finance division, Lovell White Durrant, the solicitors acting for the purchasers wrote to MV Ltd on 26 June 1996 stating among other matters, “We have de facto exclusivity even though they cannot confirm it in writing for tax reasons.”  The letter mentioned the tax structure and continued,

“The holding of the [R family] in [Holdings] is held, some direct and some through trusts.  About 50% of the trusts onshore and 50% are offshore through the British Virgin Islands. Apparently the structure set up has now been snookered by the last Finance Act and they want to get over the point by interposing a Dutch holding company between the BVI Company and [Holdings].”

“They” in the context referred to the firm of chartered accountants.

31.	On 5 July 1996 a letter setting out the terms of engagement for taxation services in relation to Project Marvel was sent by the firm of chartered accountants addressed to the shareholders of Holdings with spaces for Mr R and Z (Suisse) (see paragraph 24 above) to sign.  Z (Suisse) was not in fact a shareholder but provided management services to C Ltd which was a shareholder.  It is not clear whether it was in fact signed.  It covered assistance during the sale of shares in Holdings encompassing “the identification and implementation of strategies, consistent with underlying commercial requirements, for the sale of the shares at an acceptable tax cost.”  It provided that only Mr R and Z (Suisse) would have authority to issue the firm of chartered accountants with instructions in relation to Project Marvel and that the firm of chartered accountants should report only to those persons.  A fee of £180,000 excluding disbursements would be payable on completion in respect of the fees of the firm of chartered accountants in the UK for “time on the capital gains tax planning aspects … up to completion.”  The fee did not include 15,000 Dutch florins for the firm of chartered accountants colleagues in Holland.  The letter stated,

“I also understand that [Dutch Trust Company] who will set up and run the Dutch company on [C Ltd’s] behalf will charge D Fl 10,000 per annum.”

32.	On 11 July the firm of chartered accountants in The Hague sent an urgent telefax to Miss A at Z (Suisse) referring to a telephone conversation that morning.  The writer said that the Birmingham office of the firm of chartered accountants had requested him or her

“to contact you directly in order to follow up on the purchase of [E BV] on behalf of his client [Mr R].”

A plan of action was enclosed of which that letter was step 5.  The letter then covered the purchase price and local management; in relation to the total costs of the structure, the letter referred to a memorandum dated 16 April to the Birmingham office of the firm of chartered accountants (which although attached to the letter was not in the bundle for the hearing), giving the total purchase price as NLG 67,500.  The memorandum stated that Dutch Trust Company would provide for management and bookkeeping services and would require an indemnity and a management agreement and a resolution in writing.  Examples of those documents were attached.  The letter continued,

“Usually, the parties to the indemnity agreement are the client, i.e. a private person, in this case the settlor of the trust, and [Dutch Trust Company].  However, for these particular cases, we could arrange with [Dutch Trust Company], that by way of exception the indemnity agreement being executed by the Trustees, (in)directly holding the shares in the BV …”

The letter then said under “Purchaser”,

“I understand that the purchaser of [E BV] will be [C Ltd] established at the British Virgin Island, and that this company is administered by you.”

A number of documents relating to C Ltd and the trust (in the singular) were then requested.  The letter enclosed a draft power of attorney for execution of the stock purchase agreement on behalf of C Ltd to be executed by the duly authorised director together with a draft power of attorney for execution on behalf of C Ltd of the Notarial deed of transfer of the shares (also to be executed by the director) which had been prepared by the civil law notary.

33.	On 15 July the same person at the firm of chartered accountants in The Hague wrote to Trust Company Bank NV with data required for drawing up the purchase agreement for E BV.  The letter confirmed that the purchase price would be NLG 67,500 and stated that the individuals were the two Appellants whose passports and bank references would be sent to Mr W.  The letter continued,

“Immediately after the transfer of the shares in [E BV] to [C Ltd], the latter company will transfer 49.9 per cent of the shares in the share capital of [Holdings] to [E BV].  As discussed, our aim is to have the structure in place by Friday July 19, 1996.  If we are to achieve the aim, the deed of transfer of the shares in [E BV] should be executed by Thursday July 18, 1996, late afternoon and the transfer of [Holdings] shares to [E BV] should take place by Friday July 19, 1996 …
In connection with the transfer of the [Holdings] shares to [E BV], I have requested [Z Trust Suisse S.A] to contact [Mr W].”

A further letter from the firm of chartered accountants on that day to Z (Suisse) said that by 19 July not only the transfer of the shares in E BV to C Ltd “should be completed” but also the transfer of 49.9% of the shares in Holdings to E BV.  Also on 15 July 1996 Lovell White Durrant prepared the first draft of the sale agreement for the shares in Holdings to the new company to be formed by MNV.

34.	Also on 15 July X Ltd, the sole director of C Ltd, “noted that [the firm of chartered accountants] have recommended that [C Ltd] acquire a Dutch company known as [E BV] and resolved that [C Ltd] acquire the shares in [E BV] and grant a Power of Attorney to [Mr W] and [Mr V] both of [Dutch Trust Company] to execute the stock purchase agreement for the acquisition of [E BV].  There was no mention in this resolution of the transfer of the shares in [Holdings] to [E BV].

35.	On 16 July Lovell White Durrant sent the first draft Sale and Purchase Agreement on behalf of MNV to the firm of solicitors, the solicitors acting for the shareholders in Holdings and GC Ltd.  The identities of the vendors were not completed because they still required details from the firm of chartered accountants of the tax structure proposed.  Also on that day Miss A at Z (Suisse) sent to Dutch Trust Company a series of documents relating to C Ltd and the settlements including Financial Statements at 5 April 1996.

36.	On 17 July at an EGM of E BV at noon the proposal of the existing managing directors to resign on 18 July, immediately after the signing of the agreement in which A BV was to sell all the shares in E BV to C Ltd, was approved as was the appointment of Dutch Trust Company as managing director immediately after the signing of the agreement for sale.  At 1700 hours at another EGM of E BV it was resolved to distribute a dividend of Dutch FL 1,109.16 as well as a dividend at the charge of the general reserve of Fl 83,243.15.

37.	On 18 July Mr W executed the purchase agreement for the shares in E BV on behalf of C Ltd and the deed of transfer was notarised; that showed the principal place of business of C Ltd as Geneva.  Earlier on that day Z (Suisse) had sent to Mr W a copy of the draft agreement approved by X Ltd on behalf of C Ltd. The shares had been acquired by A BV in March 1995, its registered office was in Amsterdam and the address of its principal place of business was the same as that of Dutch Trust Company.  On the same day a management agreement was prepared between E BV and Dutch Trust Company providing that Dutch Trust Company would be responsible for the day-to-day management of E BV.

38.	Also on that day the firm of solicitors wrote to the firm of chartered accountants referring to “those shares which are being sold by the Dutch BV and/or any Trustees” asking for a letter from the directors or the Trustees as appropriate formally instructing them to act on their behalf.

39.	On 19 July at 1240 hours the firm of chartered accountants in Manchester faxed to Z (Suisse) a draft agreement for the sale of C Ltd’s shares in Holdings to E BV for £23,700,000 together with a draft memorandum by E BV acknowledging a loan by C Ltd of that sum free of interest repayable on demand asking for any comments as soon as possible.  The draft agreement provided that if E BV should transfer any shares within three years to a third party it should pay an additional consideration equal to 95 per cent of the excess over £23,700,000 less expenses.

40.	On 23 July an agreement was signed in identical form to the draft sale agreement apart from the insertion of the registered number of E BV and its address and the name and address of Z (Suisse) S.A. for the purpose of notices to the vendor.  It was executed by X Ltd on behalf of C Ltd and by Mr F and Mr H on behalf of E BV.  A memorandum of loan in identical form to the draft in the sum of £23,700,000 was signed for Dutch Trust Company by Mr F and Mr H on behalf of E BV and for X Ltd by Miss A and another on behalf of C Ltd.  The original was a faxed copy.  From the Fax print-offs it appears that it passed successively from the firm of chartered accountants’ Tax department to Z (Suisse) on 23 July at 1735 hours to Dutch Trust Company on 24 July at 1753 hours.  Mr F and Mr H had been authorised to sign on behalf of E BV at a board meeting on 23 July.  The statement of Mr W made after examining the files of Dutch Trust Company on E BV contains no reference to any material showing the basis of the price of £23.7 million or of any advice being received in respect of the transaction.  Neither did Witness 2 give evidence of any such material in the files of Z (Suisse) or X Ltd.  A letter from Z (Suisse) of 24 July to Dutch Trust Company marked “By Courier” referred to enclosing the agreement signed by C Ltd to be signed by E BV and returned.  Another letter from Z (Suisse) on that day to the firm of chartered accountants stated that Miss A would discuss with Mr R on his return the cost of sending the certificate to Holland; presumably this was the Holdings certificate. A further letter by Dutch Trust Company to Z (Suisse) of 24 July stated that the duly signed agreement was forwarded therewith.  On the same day Dutch Trust Company forwarded to Z (Suisse) a resolution, the management agreement and an indemnity agreement stating that all had been signed.  On 25 July a resolution by Z (Suisse) for the trustees as ultimate beneficiary of E BV approved the management agreement between E BV and Dutch Trust Company; this provided for Dutch Trust Company to act as managing director and obliged it to “act in accordance with the resolutions of the Board of Directors of the Company and policy instructions issued by the Shareholders of the Company.”   No policy instructions were in fact issued.

41.	On 5 August 1996 Mr M, of the firm of chartered accountants’ Corporate Finance department, wrote to Dutch Trust Company enclosing a copy of the engagement letter signed by the Appellants in March 1995 (see paragraphs 15 to 18 above) asking Dutch Trust Company to “adopt the terms of the engagement letter in relation to the shares in [Holdings] under [E BV’s] control”.  The letter stated that a number of parties had made offers for Holdings and that on receipt of the signed copy Dutch Trust Company would be informed of the progress of discussions.  This was signed and returned on 13 August.

42.	On 6 August the firm of chartered accountants sent to E BV at Dutch Trust Company an engagement letter for taxation services in not dissimilar terms to the engagement letter referred to at paragraph 31 above but adding Dutch Trust Company to those authorised to give instructions in relation to Project Marvel and providing for reporting to Dutch Trust Company.  The letter included the following:  

“Until advised otherwise in writing by yourselves, we shall work on the basis that only [Mr R], [Z (Suisse)] and [Dutch Trust Company] have authority to issue us with instructions in relation to Project Marvel.”

Mr W was one of Dutch Trust Company signatories on behalf of E BV; this was dated 14 August.

43.     Negotiations  continued between the firm of chartered accountants’ Corporate Finance department on behalf of the vendors and representatives of MNV.  Witness 1 said at a meeting on 7 August that exclusivity would be granted upon confirmation of an offer acceptable to Mr R.  In a letter dated 19 August the total offer was stated to be £73.2 million (including £3.2 million tax) on the basis of audited net assets at 30 June 1996 of £30.8 million. There is no record of any further communication with E BV or Dutch Trust Company until 30 September when Mr S informed Dutch Trust Company that an offer had been received which had been agreed in principle by all the Shareholders other than E BV.  We return to this.

44.	On 19 August Witness 1 wrote to MV Ltd confirming the firm of chartered accountants’ understanding of the offer and stating that exclusivity would be granted until 13 September on receipt of a signed confirmation of the terms in the letter. Clearance applications under section 707 of the Income and Corporation Taxes Act 1988 and section 138 of the Taxation of Capital Gains Tax Act 1992 were submitted on behalf of the shareholders in Holdings and GC Ltd on 23 August enclosing the statutory accounts to 30 June 1995. The applications stated that C Ltd had disposed of its shareholding in Holdings to its 100 per cent subsidiary E BV at market value and included the purchase by Newco of E BV’s shares in Holdings for cash.  On 30 August Mr R signed an exclusivity agreement with MNV on behalf of himself and all other shareholders in Holdings and GC Ltd.

45.	On 2 September 1996 NatWest Ventures wrote to Witness 1 expressing interest in GC Ltd and giving an indicative valuation in excess of £100 million.  They prepared a presentation on 3 September but were informed that a preferred purchaser had an exclusivity agreement.  This was confirmed by telephone on 16 September.

46.	On 3 September the Inland Revenue gave clearance under section 138; section 707 clearance was given on 2 October.

47.	On 10 September the firm of solicitors sent a draft form of agreement to the firm of chartered accountants and asked who would be executing the agreement for E BV and what arrangements were in place for corresponding with E BV.

48.	There was a major meeting on 19 September to discuss issues prior to completion, attended by representatives of the purchasers, by Mr K of GC Ltd, by Witness 1 and Mr S from the firm of chartered accountants and by the firm of solicitors and Lovell White Durrant.  Among matters considered was the position of E BV in respect of warranties.  The firm of solicitors acknowledged that the consideration received by E BV would need to be ring fenced for a period to give security for warranty claims and that C Ltd would also need to be a party as E BV was obliged to distribute to C Ltd.  It was agreed that on the question of security Mr R and E BV were to be considered together.  

49.	Mr S’s letter to Dutch Trust Company of 30 September started by acknowledging the letter of 13 August mentioned at paragraph 41 above and stated that he was writing to explain progress.  The letter stated that the shareholders of Holdings and GC Ltd had received an offer for their entire shareholdings and continued,

“This offer, which is outlined below, has now been in principle agreed by all the shareholders in [Holdings] and [GC Ltd] other than [E BV], and I would be grateful if you could also confirm your willingness to accept it on [E BV’s] behalf.”
The letter stated that the offer valued GC Ltd at £70 million and E BV’s holding in Holdings at £30.8 million.  

50.	It stated that the detailed structuring was explained in a tax clearance application which was enclosed.  Mr S’s letter then referred to the proposal in the clearance application for Holdings to buy back the shares in the UK children’s trust for £3 million and part of the Appellant’s personal holdings for £16.3 million, which would result in the holding of E BV in Holdings increasing to 72.94 per cent for which E BV would receive a cash consideration subject to £5 million being deferred.

51.	The letter then outlined warranty arrangements which were still under discussion.  The proposals included an overall warranty of £50 million with joint and several liability between Mr R and E BV, a guarantee of E BV’s liability by C Ltd and the shareholders of C Ltd, an agreement by E BV, C Ltd and the shareholders of C Ltd not to distribute part of the receipts (other than to each other) for a specified period and the deferral of £5 million of the consideration.

52.	The letter then set out the completion procedures as follows,

“Completion procedures

Completion of the proposed acquisition by Newco [the new company to be formed by [MNV] to buy the business] is planned for 10 October 1996 in London.  [E BV] will be required to be a party to the sale and purchase agreement (including the warranties) and hence, assuming you are happy to accept the offer, arrangements will need to be made for [E BV] to sign the appropriate documentation at completion (either in person or by fax).

[C Ltd] and its shareholders will also need to join with [E BV] in a separate agreement to provide for the warranty obligations and non-distribution of funds referred to above.

As a shareholder in [Holdings] [E BV] will also need to approve the buy back of shares in [Holdings].

The firm of solicitors, to the vendors will be co-ordinating the completion process and the contacts there are [Mr AH] [(0161 xxx xxxx)] and [Witness 3] [(tel: 0161 xxx xxxx)] [(fax no. 0161 xxx xxxx)].

They will wish to talk to you in advance of completion to ensure that the appropriate documentation is in place.

I would be grateful if you could respond to confirm who will co-ordinate completion from [Dutch Trust Company].  As you will appreciate we are working to a tight timescale and need therefore to ensure efficient communication.  If you have any queries, please contact myself, [Mrs ED] or [Witness 1] [(at the firm of chartered accountants’ Corporate Finance department on 0161 xxx xxxx)].”

53.	Mr S closed by writing that he had copied the correspondence to Miss A of Z (Suisse) who had management authority for the trust shareholders in C Ltd and asked her to forward it to the appropriate party.  A letter dated 30 September by Mr S of the firm of chartered accountants to Z (Suisse) enclosing a copy of his letter to Dutch Trust Company contained the following,

“This letter explains a proposed transaction involving the sale of [Holdings] and [GC Ltd] …  There are certain agreements which it is likely that [C Ltd] and the trusts will be asked to be party to in relation to the proposed transaction.  I would be grateful if you would confirm that you are comfortable with the type of arrangements proposed, further details of which will be supplied in due course.”

Miss A was asked to copy the correspondence to whoever had authority to sign for C Ltd.

54.	The response by telefax was on 7 October 1996.  Mr D of Dutch Trust Company informed Mr S that he and Mr L, both account managers, were taking care of the day-to-day business of E and that Mr W, a trust officer in the legal department, would be handling any legal matters.  The letter stated, 

“… We hereby inform you that we prefer to complete any documentation by fax first instead of coming to London on the 10th October 1996.”

An action list by the firm of chartered accountants dated on the same day included under “Trusts”,

“-  initial discussion with [Miss A]				MAS
 -  initial discussion with the [Trust Company]		MAS
-	letter of [the firm of chartered accountants’ 
Corporate Finance department] 
recommendations to [E BV]				MAS
 -  fax draft sale and purchase together with list of 
     timings to be signed					EOD
 -  [E BV]to recommend to [C Ltd]/trusts			JR
 -  liaise for completion					MS/EOD”

“JR” was Mrs J of the firm of chartered accountants at Manchester.

55.	On 8 October Mr S of the firm of chartered accountants’ Corporate Finance department sent a letter of fourteen paragraphs to Mr W, referring to a recent telephone conversation with Mr D, “to provide our views on the proposed transaction.”  The letter which was copied to Z (Suisse) outlined the negotiations and mentioned the approach from Nat West Ventures (see paragraph 45 above), stated that it was based on an unrealistic assumption as to debt financing and expressed the view that the offer was unlikely to remain at that level after due diligence.  The firm of chartered accountants recommended that the offer by MNV of £30.8 million in cash for E BV’s holding with a deferred element of £5 million should be accepted and asked for confirmation that Dutch Trust Company was happy to proceed.  The letter stated that there would be a number of documents to be executed by E BV, C Ltd and Z (Suisse) and attached draft copies of the Share Purchase Agreement (draft number 3) and Guarantees.  The letter said that the purchasers required opinions from lawyers in the Netherlands, British Virgin Islands and Switzerland as to the powers of the companies to enter into these agreements.  The letter contained no enclosures.  Although it stated that a revised forecast of profits of £11 million for the year to 30 June 1996 had been produced (see paragraph 29 above) there is nothing to show that this was provided to Dutch Trust Company.  The clearance applications referred to at paragraph 50 above had been supplied to Dutch Trust Company on 30 September.

56.	A memorandum of the firm of chartered accountants of 8 October to the firm of solicitors contained comments on the documentation.  Under the guarantee it included the observation, “It is critical that [E BV] are seen to be acting independently and making their own decisions.”  In respect of clause 5.8 of the Sale and Purchase Agreement there was this comment, “There should be no indication that [Mr R] has any influence over [E BV] which is free to make its own decisions and commitments”.  Clause 5.8 of the draft read, “[Mr R] and [E BV] hereby jointly and severally agree and undertake to comply with the provisions of Schedule VIII through the term of the Warranties.”  Schedule VIII contained investment restrictions in the period to 30 September 1998.

57.	Instructions from the firm of solicitors dated 8 October to lawyers in the British Virgin Islands to advise on the legalities of C Ltd entering into the various agreements and obligations stated,

“For tax reasons an offshore structure has been established so that the principal shareholder and vendor is a Dutch company, [E BV] which is administered by [Dutch Trust Company].”

The firm of solicitors instructed a firm of Dutch solicitors, to advise in relation to E BV; on 10 October they asked Dutch Trust Company to provide to them various documents including board minutes, resolutions and powers of attorney for this purpose.

58.	On 11 October Mr D returned to the firm of solicitors by fax a shareholders’ resolution of Holdings signed on behalf of E BV, which had been sent earlier on that day, approving the resolution for Holdings to purchase its own shares.

59.	On 15 October the firm of solicitors sent to Z (Suisse) a copy of a draft resolution by C Ltd as shareholder of E BV approving the draft Sale Agreement. This resolution had been drafted by the firm of Dutch solicitors instructed by the firm of solicitors. The resolution, which was passed on 17 October in Geneva was signed by X Ltd on behalf of C Ltd as sole shareholders in E BV, recited that a copy of draft number 6 of the Sale Agreement had been produced and that C Ltd was of the opinion that the sale agreement was in the best interests of E BV and the group to which it belonged and approved the entering into the agreement for sale of the shares in Holdings by E BV.

60.	Also on 17 October X Ltd as sole director of C Ltd resolved to support E BV in the disposal of its shares in Holdings by entering into a guarantee with the purchasers a draft of which was provided.  Both of these resolutions were signed by Mr I and Miss A on behalf of X Ltd.

61.	On the morning of 15 October Lovell White Durrant transmitted to Dutch Trust Company a copy of the latest draft of the sale agreement of 100 pages including the front sheet.  Also on that day the firm of solicitors asked Dutch Trust Company for details of the bank account to which the consideration should be paid for completion on the Thursday (17 October).

62.	On 16 October Dutch Trust Company faxed Mr S that they agreed the agreements as drawn up and upon execution would sign them on behalf of E BV.

63.	On 17 October the firm of solicitors faxed Z (Suisse) that final form documents would be circulated on the following morning for execution at 1700 hours UK time, 1800 hours Dutch time and 1100 hours British Virgin Islands time.  In the event completion was on Monday, 21 October.

64.	On 18 October the final version of the agreement was faxed by Lovell White Durrant to the parties, among them Dutch Trust Company.  On the same day the firm of Dutch solicitors provided an opinion to the purchasers that the agreements would constitute valid and legally binding obligations of E BV when duly executed by Dutch Trust Company.

65.	On 21 October 1996 Dutch Trust Company faxed to Lovell White Durrant a number of documents signed by it as managing director of E BV.  These included page 100 of the Sale Agreement, a stock transfer form for the Holdings shares and a certificate confirming that the facts at clause 3.2 in the guarantee by C Ltd were correct.  It was agreed at paragraph 11 of the Agreed Facts that the shares were sold on 21 October by E BV.

66.	The final Sale Agreement was 101 pages long.  E BV received £30,799,384 in cash, of which £5,033,699 was deferred pending set-off of advance corporation tax on a dividend by GC Ltd and the purchase by Holdings of its own shares (see paragraph 50 above).  Under clause 5.1 Mr R and E BV entered into a joint and several warranty and the other shareholders entered into several warranties; these were the type of warranties which are usual in such a sale agreement and related to Holdings and GC Ltd and their assets and liabilities and their transactions since the last balance sheet date, namely 30 June 1996; for periods up to 30 September 1998 E BV accepted investment restrictions (under Schedule VIII) in respect of amounts secured which commenced at £15 million.  Under Schedule V the vendors warranted that the accounts annexed to a disclosure letter by the firm of solicitors gave a true and fair view of the state of affairs at the balance sheet date. The maximum aggregate liability of Mr R and E BV under warranty claims and a deed of tax covenant was £44 million, however E BV’s liability was limited to the amount received by it.  Clause 7 contained certain specific indemnities under which E BV was jointly and severally liable with Mr R.  The range of investments permitted under Schedule VIII was in fact wide and including government stock and bank deposits in UK, Switzerland, the EU and USA, real property in the UK and (subject to a 50 per cent ceiling) shares and securities listed in the UK, USA and EU.

67.	The guarantee by C Ltd referred to at paragraph 60 above was also executed on 21 October.  The guarantee which was to Group Ltd, the purchaser of the shares, covered the failure by E BV to make any payment due under the Sale Agreement or the Deed of Tax Covenant.  Clause 3.1 provided,

“The Guarantor warrants and undertakes that apart from its interest in [E BV], [E BV’s] holding in [Holdings] and the transactions in relation to [Holdings] provided for … in the Sale Agreement …, it and [E BV] have no interest in other business, and they have no liabilities whatsoever (other than liabilities to each other … in relation to the formation of the Guarantor, the acquisition of [E BV], the acquisition of shares in [Holdings], the transactions contemplated in the Sale Agreement and for tax in respect of the proceeds of sale of shares in [Holdings] and professional and administration fees.)”

Under clause 3.2 C Ltd undertook to exercise its powers as shareholder in E BV as far as it could to ensure that E BV carried on no other business and incurred no liabilities apart from holding the assets payable on the sale and complying with its obligations under the Sale Agreement.  Under clause 3.3 C Ltd undertook to incur no other liabilities without prior written consent.

68.	Also on 21 October, Z (Suisse) wrote to Group Ltd to confirm that the statements in clause 3.1 of the guarantee were true.  The letter stated that this was required as a pre-condition of Group Ltd entering into the Sale Agreement.

The witnesses

69.	Witness 1 confirmed his written statement.  He stated that he led the team at the firm of chartered accountants responsible for corporate finance advice, Mr S being his principal assistant on the transaction. Negotiations with MNV were conducted by the firm of chartered accountants, although consultation was mainly with management in dealing with due diligence issues.  The firm of chartered accountants regarded themselves as acting in the interests of all shareholders including minority shareholders.  MNV required exclusivity : E BV was not a party to this because they would have had to be briefed thus delaying the transaction. Mr R’s position was clearly pivotal, since if he was prepared to sell it was likely that the others would follow his lead and if he was not so prepared the purchasers would not proceed.  Witness 1 stated that Mr S kept him briefed as issues arose.  When legal matters were fairly advanced Mr S wrote to Dutch Trust Company on 30 September 1996 to appraise them of the main terms of the offer (see paragraph 49 above).  He said that the recommendation on 8 October (see paragraph 55) was relatively unusual since for risk management reasons the firm of chartered accountants preferred shareholders to make their own decision.  He said that he was confident that the letter of 8 October was written at E BV’s request.

70.	Cross-examined, Witness 1 said that he remembered E BV asking Mr S for a recommendation.  Mr S was now a partner of Ernst & Young.  Witness 1 himself did not recall speaking directly to Dutch Trust Company.  He said that tax was not one of his areas of expertise. Mr R thought in terms of sale of the whole business; there were shareholders outside the family but it was assumed that they would be prepared to sell.  Witness 1 said that he himself was not involved in the change in share structure, but was kept informed.  He was confident that E BV, which was professionally managed by Dutch Trust Company would be a rational shareholder.  The off-shore structure was an additional complication which he would rather not have had but all shareholders had an identity of interest.  Commercially he felt that if Mr R was satisfied the others would follow his lead.  He said that the firm of chartered accountants did not report to E BV until a reasonably firm offer was likely.  Until 13 August they had no contract with E BV.  He did not see the letter to E BV about tax advice dated 6 August (see paragraph 42).

71.	Witness 1 told Mr Brennan that he would prefer never to grant exclusivity.  He did not think that Mr R consulted anyone else about exclusivity, but the purchasers regarded Mr R as pivotal.  He said that he met NatWest and reported to Mr R but not to E BV.  He said that many transactions fail on the day of completion.  He said that the people MNV wanted to meet were the management; he was sure that Mr S would have kept E BV “up to speed”.  He said that the events were 6-7 years ago; he was no longer with the firm of chartered accountants but had reviewed the files.  He said that it was not normal practice to file up-date telephone calls.  It would be surprising if the letter of 30 September was sent “out of the blue”.  The managers were aware of the due diligence process over a period of months and their own contracts had to be discussed.  There was much less to discuss with E BV.  He assumed that E BV received legal advice from the firm of solicitors as to the warranties.  E BV had received the engagement letter and knew what was going on.  He said that he believed that Dutch Trust Company did make its own commercial decision.

72.	In re-examination, Witness 1 said that the transfer of shares to C Ltd and then E BV did not change the corporate finance fundamentals.  The transaction had been moving from day-to-day and Mr R and E BV did not require the minutiae.  He said that he had no contact with Z (Suisse).

73.	Witness 4, who was at the relevant time the senior tax partner for the firm of chartered accountants in Manchester and Liverpool, confirmed his written statement.  He stated that having advised Mr R on techniques to reduce the capital gains tax liability of the Appellants on a sale the firm of chartered accountants were instructed to implement the offshore structure involving C Ltd.  Following the Finance Act 1996 the firm of chartered accountants devised plans to reduce the tax on disposal of C Ltd’s interest.  This included the formation of a Dutch incorporated and resident subsidiary of C Ltd to which C Ltd would sell its shares in Holdings at market value.  On a subsequent sale there would be a tax liability in the Netherlands on that company’s gain.  Under the double tax treaty there should be no liability to UK tax in respect of the sale.   He stated that during May and June 1996 the firm of chartered accountants advised Z (Suisse) as agents to the trustees of the changes in the legislation and recommended that the trustees consider implementing the planning.  He stated that on 23 July C Ltd sold its shares in Holdings to E BV, its 100 per cent subsidiary, at market value.  He stated that throughout the period, as personal tax advisers to the Appellants, the firm of chartered accountants kept them informed of the actions of the trustees and the implications for their personal tax liabilities. 

74.	In cross-examination Witness 4 denied that it was decided that E BV would sell its shares before it existed; he said that the scheme was set up on the basis that if the sale happened it would be effective. In any situation where the executives were keen to sell, minority trustees were likely to sell.  He said that the firm of chartered accountants spoke about the position to the trustees on a number of occasions; he thought that he told them that they would have to take their own decision.  He said that some trustees take a commercial view.  Asked whether he told Mr R that in practice it was certain that E BV would sell, he said that he did not recall telling him that.

75.	Asked about the price at which C Ltd sold its shares in Holdings to E BV, he said that he thought that there was a price based on the likely sale price with an adjustment if the likely sale price was different.  He did not recall any advice to the directors of E BV on the price paid by them to C Ltd.  There was no formal valuation.  After a break to look at the bundle, Witness 4 said that the draft sent on 19 July (see paragraph 39) included the figure of £23.7 million which the firm of chartered accountants suggested : the covering note read, “As discussed this is the draft …”  He said that E BV presumably considered the price appropriate for a transfer by C Ltd to its 100 per cent subsidiary.  The directors of E BV must have approved the agreement under guidance from its parent company and with the benefit of an indemnity.  Asked whether a pro rata valuation was appropriate for a 49 per cent interest, Witness 4 said that he was not a valuation expert and that the price may not have been pro rata.  Asked about the risk of the loan outstanding if the ultimate sale price was lower, he said that the loan was from E BV’s parent and that although E BV did not have an indemnity the directors did.

76.	Witness 4 said that the letter to E BV regarding taxation services (see paragraph 42) could have been better worded: it reflected tax advice on the transaction as a whole and E BV was a shareholder in Holdings.  He denied merely treating E BV as a component in the scheme.  He could not remember whether C Ltd had signed up to the engagement letter (see paragraph 31). He believed that the firm of chartered accountants’ colleagues in the Netherlands provided separate tax advice which was not covered by the £96,360 charged by the firm of chartered accountants to E BV for tax services.

77.	Re-examined, he said that following the gift of shares to C Ltd Mr R had no power to ensure that C Ltd and E BV would do as he wished.  He had experienced clients who would not want to undertake that sort of tax planning.  The documentation showed the material put in front of C Ltd.  He would not have thought that E BV was at any commercial risk.

78.	Witness 2, currently a Senior Trust Manager at Z (Suisse), confirmed a statement in which he said that he did not have first hand knowledge of the events, being the successor to Miss A and Mr I who were the trust officer and manager involved. He had reviewed the documents.  It appeared from these that Z was recommended by the firm of chartered accountants to the Appellants as an appropriate offshore trustee.  He stated that it also appeared to him that Z (Suisse) and A Trustees (BVI) Ltd acted appropriately and met their respective obligations as administrator and as trustee throughout the period in question.  It was clear that Z (Suisse) was being advised by the firm of chartered accountants and followed that advice.  Following the Finance Act 1996 the trust assets were restructured through the purchase of E BV to enable a tax efficient disposal of the shares in Holdings.  He stated that he believed that the documents bear out a significant involvement at various levels in the trust structure. He stated that it was uncommon for a trustee resident in the British Virgin Islands not to appoint an agent in another jurisdiction to perform administrative duties. He said that Z (Suisse) preferred to avoid minority holdings because they could not exercise significant influence over the company and such holdings were illiquid and often non-income producing.  The structure in this case was set up with a view to selling the minority holding.  He said that there was no indication in the files of Mr R seeking to impose his views on Z (Suisse).  He said that he had seen the recommendation by the firm of chartered accountants and had seen that Z (Suisse) as agent for the trustees had taken independent advice.

79.	Cross-examined, Witness 2 said that he had studied the files in Geneva and had requested documents from Z in the Cayman Islands.  Asked about the C Ltd resolution of 17 October (see paragraph 58) he said that he could not recall any evidence that it was sent to Holland.  He said that draft number 6 of the sale agreement was in the files.  He said that the drafts were reviewed by Mark Barmes of Lenz & Staehelin.  He said that from the documents he had reviewed, due consideration was given on behalf of the trustees in relation to the sale of the Holdings shares; he had seen C Ltd’s files but not those of E BV.   He said that Miss A is in Jersey but is not now working for Z and that Mr I is in Geneva but not now with Z.

80.	Witness 3, of the firm of solicitors, confirmed his statement.  He acted in relation to the sale to Group Ltd along with Mr AH, who was in charge, and Mrs PO.  They were instructed by the firm of chartered accountants’ Corporate Finance department on behalf of all the shareholders.  They advised the UK shareholders that they were acting for them as a group not individually.  The firm of chartered accountants Corporate Finance liaised with the overseas shareholders; they were project managing the process and that involved liaising with E BV and Z (Suisse).  Although the firm of solicitors had a number of meetings with Mr R and the management team to explain progress and obtain instructions where necessary, Mr R did not involve himself in the day-to-day progress.  E BV did not attend meetings in the UK but he was told by the firm of chartered accountants that E BV and any directors and shareholders would as a matter of course obtain their own legal advice if they considered this prudent.  He never advised any of the trusts on the transaction but did liaise with them.  The firm of solicitors instructed a Dutch firm of solicitors to deliver a legal opinion as to the power of E BV to sign documents and that firm drafted resolutions. He had a number of conversations with Mr Barmes, of Lenz & Staehelin, who were advising the trustees and amendments suggested by them were made to the documents.  He said that his firm received no instructions from Mr R regarding the sale by E BV.

81.	Cross-examined, he said that the firm of solicitors started acting in July 1996, their first letter being on 18 July (see paragraph 38).  He said that draft number 3 of the sale agreement was sent to E BV on 8 October and two days later another draft was sent.  He himself sent draft number 6 on 18 October.  He said that Mr R did not necessarily see drafts 5-7.  He said that from the outset the purchasers wanted joint and several guarantees; it was not unusual for the two largest shareholders to give a joint and several warranty.

82.	The statement of Mr W dated 20 October 2003 was admitted under regulation 17(5), see paragraph 12 above.  At the time he was head of the legal department of Dutch Trust Company.  Due to the passage of time he stated that he was unable specifically to remember the events but had examined the files.  The first contact appeared to have been immediately before the fax of 15 July 1996 (see paragraph 33).  Dutch Trust Company performed the day-to-day management of E BV through two persons, Mr D and Mr L who have left the company.  The statement of Mr W makes no mention of any documents or contact between the acquisition by C Ltd of E BV’s shares (see paragraph 37) and the purchase of the Holdings shares by E BV on 23 July (see paragraph 40).  His statement makes no mention of any documents or contact between 13 and 14 August when Dutch Trust Company signed the engagement letters and Mr S’s fax of 30 September (paragraphs 49 to 53). He stated that normal practice was for Dutch Trust Company legal counsel to review legal documentation and that no doubt he did so but due to the passage of time he had no recollection of so doing.  Clearly there was no file note of any review.  On the basis of Mr S’s recommendation (paragraph 54) E BV, represented by Dutch Trust Company, sold its shares in Holdings. The file showed that on 17 October C Ltd issued a written resolution as sole shareholder in E BV approving entering into the sale agreement.  E BV’s part of the consideration was received in its Dutch bank account and transferred to C Ltd to repay the loan.

E BV’s accounts and tax return

83.	The accounts of E BV for 1996, which were not audited, no audit being required by reason of article 396 of the Dutch Civil Code, gave the principal activity as acting as a holding company. It stated that the company acquired the shares in Holdings for NLG 61,335,600 (£23.7 million) and sold them during the year for NLG 84,097,718 (equivalent to £30,799,384).  The profit and loss account showed “Result on sale part of investment”, NLG 2,716,011 and bank interest NLG 3,695; this presumably did not include the deferred consideration, since income was stated as recognised when received.  Expenditure was NLG 1,784,156, which was effectively attributable to fees including NLG 1,095,395 corporate finance advice fees.  The Director’s management fees were NLG 3,666.67.  Current assets totalled NLG 15,176,454, of which NLG 14,904,783 was the deferred consideration and NLG 270,834 cash at bank.  Apart from NLG 837 interest receivable, there were no other assets.  E BV’s income tax return for 1996 showed a taxable profit of NLG 935,550 on which Dutch tax was NLG 329,442.

Articles of C Ltd

84.	Article 86 of the Articles of C Ltd allowed a corporate director to appoint any person as its duly authorised representative to represent it at meetings or give written consents.  Article 97 provided that if the company should have only one director the provisions for meetings of directors do not apply but such director has power to act in all matters as are not required to be exercised by the members and in lieu of a meeting shall sign a note.

Declaration by Dutch tax authorities

85.	On 18 November 1999 the Inland Revenue requested information from the Dutch tax authorities under Article 25 of the Double Taxation Convention and the EC Mutual Assistance Directive 77/799 in connection with a civil investigation into the sale of the Holdings shares by E BV.  On 23 May 2000 the Dutch authorities provided copies of the agreements for the purchase of the shares by E BV and the sale by E BV; that letter stated that Dutch Trust Company had acted as manager of E BV from the date of incorporation in 1995.  On 19 February 2003 the Inspector of the Tax Administration in Amsterdam made a declaration that E BV “is a corporation according to Dutch legislation and is a resident of the Netherlands within the meaning of Article 4 of the Convention.”  On 8 March 2003, the Dutch authorities made a further response to the 1999 request for information which included the following,

“The further investigation convinced the Dutch tax department that the [Trust Company BV] executed the actual management of [E BV] as a result of which the fiscal residence of [E BV] is located in the Netherlands.”

Disclosure

86.	In directions released on 20 June 2003 the Appellants were directed to provide to the Commissioners a list of the documents including draft and final letters, contracts, agreements, reports, notes of meetings and telephone calls, e-mails and any other records in their possession or person relating (a) to the establishment, management and control of E BV, (b) to the negotiations for the sale of the Appellant’s shares in Holdings and  (c) to the actual sale.  On 4 July 2003 the firm of chartered accountants provided an extensive list which included material received by them as taxation agents for the Appellants from Dutch Trust Company and Z (Suisse).  There was no suggestion that the list was incomplete and it must be assumed that all relevant documents are included in the common bundle.  The Revenue also obtained material from Lovell White Durrant who acted for MNV, under section 20 of the Taxes Management Act 1970, and from the Netherlands tax authorities to which we have already referred.

Appellant’s oral submissions

87.	Mr Tallon submitted that neither Mr R nor anyone else in the United Kingdom had any standing or authority in relation to E BV, C Ltd or the off-shore settlements, to require or force a purchase of the shares in Holdings by E BV or the sale of those shares.  The purchase of the shares in July having been approved by Dutch Trust Company as managing director, Dutch Trust Company as director of E BV was at all times seized of the control and disposition of those shares subject only to legitimate directions from the shareholders.  The sale in October was made as the result of the decision by Dutch Trust Company, (i) with the full concurrence of its immediate shareholder, C Ltd; (ii) with the full concurrence of its ultimate shareholders, the off-shore settlements, represented by Z (Suisse) and (iii) pursuant to a specific recommendation by the firm of chartered accountants whose services had been engaged by E BV.

88.	He said that having given away his shares Mr R could not enforce his will.  No particulars had been given of how he was alleged to have done so.  There was no evidence that he had tried to do so or that he had communicated with anyone with authority to sell.

89.	Mr Tallon said that Witness 4 had said that the sale by C Ltd to E BV was at market value.  At the time offers were being solicited; there was no need for exactitude between parent and subsidiary and the sale included an adjuster clause.  It had been said that no valuation material had been given to E BV’s board, but the same applied to C Ltd’s board.  The trustees had to take account of the professional advice as to a large potential liability to capital gains tax on a sale by C Ltd.  The restructuring on 23 July stood entirely on its own; if anyone other than the director made it happen it was Z (Suisse) as agents for the trustees.

90.	He said that the sale by E BV in October was not relevant to the July transaction.  If, contrary to his submission, it was relevant, the decision to sell was made by Dutch Trust Company as managing director of E BV.  It had received draft copies of the agreements before signing the final documents.  It had received the recommendation from the firm of chartered accountants and it had received the approval of its shareholder, C Ltd.  Nowhere could the hand of Mr R be seen.  The only conclusion must be that the central management and control of the business of E BV was not in the United Kingdom.

91.	Mr Tallon said that the residence of a company is where its real business is conducted, which in turn is where its central management and control really abides, see De Beers Consolidated Mines Ltd v Howe [1906] AC 456; STC 198.  It is necessary to find out where the directors carry on the real business.  When they conduct the business in two places, it is necessary to decide where the central control is in fact exercised.  In De Beers this was in London; here the central management and control of E BV was exercised in Amsterdam.

92.	He said that regard must be had to the constitutional position and to the system of company law of the relevant country.  If the functions of the board are usurped, then it is irrelevant that the usurpation was unconstitutional.  That was the position in Bullock v Unit Construction Co Ltd [1960] AC 351; 38 TC 712.  He adopted the summary of the law in Untelrab Ltd v McGregor [1996] STC (SCD) 1 at paragraphs 65 to 80.  Here the Revenue were contending that Mr R who had no legal standing imposed his will on the director.  The constitution of the company is not irrelevant, see Re Little Olympian Each Ways Ltd [1995] 1 WLR 560 at page 568G and 527H to 573G.  Here there is no evidence that Mr R usurped the powers of the board of E BV.

93.	Mr Tallon said that if, contrary to his primary submission, the Tribunal concluded that the central management and control was in the United Kingdom, then Article 4.3 of the 1980 Double Taxation Treaty between the United Kingdom and the Netherlands applied by virtue of section 249 of the Finance Act 1994.  The Dutch tax authorities had declared on 19 February 2003 that E BV is a resident of the Netherlands within Article 4; and confirmed this in a letter dated 8 March 2003.  Under Article 4(3) E BV is deemed to be resident in the state in which its effective management is situated.  In Statement of Practice No.1 of 1990, the Inland Revenue recognised the possibility of the effective management being in a place different from that of central management and control.  The place of effective management is, he submitted, where the head office usually is and where the executive directors actually run the business.  Even if the policy was dictated from London, the implementation was by Dutch Trust Company in the Netherlands.

94.	Mr Tallon submitted that if the Tribunal concluded that E BV was resident in the United Kingdom, then C Ltd must also have been resident in the United Kingdom.

Revenue submissions

95.	Mr Brennan said that it was for the Appellants to show that the assessments were wrong; in order to do this they had to prove on the balance of probabilities that E BV was non-resident, being centrally managed abroad. There was no need for the Revenue to show how Mr R exercised control, the burden stayed with the Appellants.  If the matter remained in doubt, they could not succeed, see Rhesa Shipping SA v Edmunds [1985] AC 948, per Lord Brandon at page 951 A-D.  It was for the Appellant to show who made the decisions and how control was exercised in E BV.  There is no obligation to make findings of fact if the evidence leaves the tribunal unsatisfied, see Davis & Docherty v Balfour Kilpatrick Ltd [2002] EWCA Civ 736 (unreported) at paragraphs 15 and 19-21.

96.	He said that the Appellants had decided not to call Mr R, although he was present.  Mr S had not been called although he could have said how the decisions were triggered and what advice was given to E BV.  Other witnesses not called included Miss A, Mr I, Mr D, Mr F and Mr S.  He said that the Tribunal was entitled to draw inferences from the absence of those witnesses.

97.	Mr Brennan said that the question of central management and control arises in varying circumstances.  De Beers was a genuine commercial organisation trading in two jurisdictions.  In Unit Construction Co there was commercial activity in East Africa but the parent in the United Kingdom took over the responsibility for decision making.  In Little Olympian there was a company with a total absence of activity and no evidence to displace the constitutional position, the company simply owned shares.  In Untelrab there was genuine activity abroad with real transactions, although the subsidiary was complaisant to do the parent’s will.  The present case was not covered by any precedent : the only reason for the introduction of E BV was for tax purposes.

98.	He stressed the words “where the management and control actually abides” in De Beers and the need for “a scrutiny of the course of business and trading.”  It was necessary to look at the position both before and after 23 July 1996.  Usurpation as in Unit Construction Co was not limited to a parent/subsidiary relationship but could be by a person without any legal control or power.  Here E BV never intended to do anything itself, all was decided for it beforehand.  The question is where were the decisions of fundamental policy actually made, see R v Dimsey [2000] QB 744; [1999] STC 845 at 858.  In Re Little Olympian concerned the question whether a company was “ordinarily resident outside the jurisdiction.”  Furthermore the facts there were very different.

99.	He said that Mr Tallon had said that directors of a company have a continuing duty to acquire and maintain sufficient knowledge of the company’s business properly to discharge their duties, see Re Barings plc (No.5) [2000] 1 BCLC 523 at paragraph 35.  However while they could delegate functions, that did not absolve them from supervising.  Dutch law is presumed to be the same as English law in the absence of contrary evidence.  If the directors did not acquire knowledge of the business they were not complying with their duty.

100.	Mr Brennan said that Mr W did not state what day-to-day management comprised; his knowledge was merely from the file; he had no recollection of receiving Mr S’s letter recommending the sale and gave no evidence as to how the decision to sell was made.  The fees paid to Dutch Trust Company of around £1,300 in 1996 could not have covered much work.  The statement by Mr W that no doubt he reviewed the legal documentation stretched credibility.

101.	He said that Mr Tallon had said that E BV had bought the shares from its parent, however the whole object was that E BV was separate.  C Ltd was protected because of the price adjustment clause, but E BV was indebted to C Ltd for £23.7 million.  There was no evidence of any advice on the purchase and no valuation of the shares.  Dutch Trust Company might have an indemnity but E BV did not.

102.	Mr Brennan said that E BV’s involvement was for tax reasons throughout.  On 18 July 1996 the firm of solicitors had referred to the shares being sold by E BV before it had acquired them.  There was no evidence of any thought being given by the director of E BV to the purchase from C Ltd.  Only in September was E BV told who its solicitors were for the sale.  The whole transaction was choreographed from the UK.  The firm of chartered accountants’ action list on 7 October referred to “initial discussion with [Dutch Trust Company].”

103.	He said that the opinion of the Dutch tax authorities as to the residence of E BV did not answer the question for UK law.  That letter was not in any sense an admission  by the Inland Revenue.  If E BV was resident in the Netherlands under Dutch law, the position was determined by the place of effective management under Article 4.3.  There was no difference in the context of a single asset/single transaction case between central management and control and the place of effective management, see Wensleydale’s Settlement Trustees v Inland Revenue Commissioners [1996] STC (SCD) 241.

104.	Mr Brennan said that it did not follow that if E BV was resident in the United Kingdom, C Ltd was also resident in the United Kingdom.  There was little evidence about the central management and control of C Ltd.  All C Ltd did was to accept a gift and sell it to its wholly-owned subsidiary.  In contrast to E BV it had no transactions with third parties dictated from the United Kingdom.  The firm of chartered accountants was not appointed on its behalf to advise it and the firm of solicitors was not engaged for it.  There was no evidence as to the other activities of C Ltd.  The appeal had to be decided on the evidence.  The fact that the Tribunal came to one conclusion for E BV did not mean that the conclusion for C Ltd should be the same.

105.	Mr Brennan produced a chronology of 11 pages with the date, the event and comment which was most helpful.  It was agreed that Mr Tallon should reply in writing since an oral reply was not possible within the time listed.  Mr Tallon’s reply was served on 11 December and Mr Brennan made a short response on 18 December.

Appellant’s Written Reply

106.	Mr Tallon said that the burden of proof had to be applied with common sense.  There was a straight choice between whether the central management and control of E BV was in or outside the United Kingdom on 23 July 1996 and, if it was the former, whether the central management and control of C Ltd was also in the United Kingdom on that date.  The central management and control of E BV had clearly never been in the United Kingdom before July 1996.  If the events in July 1996 happened independently of the boards of C Ltd and E BV, it could only have been at the direction of Z (Suisse) on behalf of the trustees.  This was also true in respect of the sale of the Holdings shares in October, insofar as that was relevant.

107.	He said that De Beers concerned residence for a year, whereas here the issue was residence on 23 July 1996.  In Bullock it was important that the parent could have procured a change in the constitution if the subsidiary directors had not accepted its directions.  The facts here were closer to Re Little Olympian that to Untelrab.  As to Barings, he said that the directors of E BV were entitled to rely on the advice by the firm of chartered accountants.

108.	Mr Tallon said that the Dutch material was not relied on for the purpose of deciding whether the central management and control of E BV was in Holland but was relied on in the context of whether the “place of effective management” was in Holland.  He submitted that “actual management” (see paragraph 84 above) was synonymous with “effective management” within Article 4.3.  The conclusion of the Dutch authorities was reached after examining the files at Dutch Trust Company.

109.	He said that the Revenue’s case depended on the assumption that the independent trustees in control of the strategic stake in Holdings failed to discharge their duty as trustees and allowed decisions to be taken in the United Kingdom without being considered by them or by the companies under their control.  The proper conclusion was that if the central management and control of E BV was not in the Netherlands it actually resided with Z (Suisse) in Geneva.

110.	If the scheme was “choreographed” by Mr R, the sale of Holdings shares by C Ltd must have been choreographed by him as well as the purchase by E BV.  Many of the documents relied on by Mr Brennan in support of the choreography argument related to the time when C Ltd owned the shares in Holdings.  It must follow from this argument that if there had been no transfer of the shares to E BV, Mr R would have been able to procure a sale by C Ltd.  He said that Mr Brennan had relied on Mr R’s agreement on 27 March 1995 to professional fees in respect of transferees (see paragraph 16 above).  It was not correct that there was no evidence as to whether C Ltd had any other business : C Ltd had warranted that it had no other business (see paragraph 66).  

111	Mr Tallon submitted that the only conclusion which could be reached is that either both E BV and C Ltd were resident on 23 July 1996 or that neither was.

112.   Mr Brennan responded by saying that there was no evidence as to the extent of the independence of the decision making at C Ltd.  The identity of the individuals at X Ltd was not known.

Conclusions

113.	There is no dispute that E BV was incorporated in the Netherlands and that C Ltd was incorporated in the British Virgin Islands.  There was no evidence to suggest that under the laws of the Netherlands and the British Virgin Islands, the companies were not resident in the jurisdictions in which they were incorporated.  Under English law a company incorporated in the United Kingdom is regarded for the purposes of the Taxes Acts as resident here, see Finance Act 1988, s.66.  In the absence of evidence to the contrary Dutch law and British Virgin Islands law is assumed to be the same as English law.  Therefore under Dutch law E BV must be assumed to be resident in the Netherlands and under British Virgin Islands law C Ltd must be assumed to be resident in the British Virgin Islands.  Certainly as regards the Netherlands that accords with our understanding of Dutch law.

114.	The test under English law in respect of companies not incorporated in the United Kingdom is however different.  It is not determined by the law of the country of incorporation but by the central management and control test laid down in De Beers [1906] AC 455.  If the result of the central management and control test is that E BV would be resident in the United Kingdom under United Kingdom law although resident in the Netherlands under Dutch law, then under Article 4(3) of the Double Tax Agreement between the UK and the Netherlands a company is deemed to be a resident “of the State in which its place of effective management [is] situated.”

115.	There is no double tax agreement with the British Virgin Islands, so that the only issue in respect of C Ltd is the place of its residence under English law.  

116.	In respect of both companies the initial issue therefore is the place of residence under English law.  For C Ltd that is determinative, but for E BV there is the further potential question of the place of effective management.

117.	The early authorities of Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83 and Cesena Sulphur Co Ltd v Nicholson (1876) 1 TC 88 established the principle that the residence of a company is where the directors meet and where they transact their business and exercise the powers conferred upon them. The basic principle established in De Beers [1906] AC 455 is that a company resides where its real business is carried on “and the real business is carried on where the central management and control actually abides,” see per Lord Loreburn LC at page 458.  The word “actually” is crucial since it was decided in Unit Construction Co Ltd v Bullock that “it is the actual place of management, not that place in which it ought to be managed, which fixes the residence of a company”, see per Lord Simonds at 38 TC page 729.

118.	In Unit Construction Co the parent usurped the powers of the boards of the subsidiaries which stood aside and did not meet at all.

119.	It is clear that the legal documents for the sale by C Ltd to E BV of the shares in Holdings on 23 July 1996 were executed by Miss A and another for X Ltd on behalf of C Ltd and by Mr F and Mr H jointly representing Dutch Trust Company which was the sole managing director of E BV.  The articles of C Ltd provided for a corporate director and article 8 of the articles of E BV provided for a legal entity to be appointed managing director. Whereas in Unit Construction Co the local board was by-passed or purported meetings did not take place, the directors of E BV and C Ltd were not by-passed nor did they stand aside since their representatives signed or executed the documents.

120.	The case for the Revenue is that Dutch Trust Company did not in fact take the decisions but did what it was told to do by Mr R or by the firm of chartered accountants acting on his behalf.  The dispute is thus not dissimilar to that in Untelrab although the burden of proof here is on the taxpayer.  The Revenue case is also that it has not been shown that the management and control of C Ltd was not abroad.

121.	The basic facts are not in dispute.  The issue is what inferences we should draw from those facts.

122.	The Appellants wished to sell their shares in the business and in 1995 engaged the firm of chartered accountants to find purchasers and to advise on the tax aspects.  A substantial liability to capital gains tax was expected.  On the advice of the firm of chartered accountants, Holdings was formed and in October 1995 49.99 per cent of the shares in Holdings were given by the Appellants to C Ltd, a newly formed British Virgin Islands company.  The shares in C Ltd were held by Z Private Trust (BVI) Ltd, a wholly owned subsidiary of Z (Suisse), as trustee of settlements made by the Appellants also in October 1995.  Z Private Trust (BVI) Ltd, the sole subscriber to C Ltd, appointed X Ltd, another company associated with Z (Suisse), as sole director.  X Ltd resolved that Z (Suisse) be appointed to provide management services and that the administrative office should be at an address in Geneva which was also that of Z (Suisse).  All of this followed the advice of the firm of chartered accountants which recommended Z (Suisse) to the Appellants. 

123.	E BV was brought into the picture because of changes in the legislation, apparently on the initiative of the Birmingham office of the firm of chartered accountants (see paragraph 32).  The firm of chartered accountants made the initial arrangements with Dutch Trust Company, including the purchase price and an indemnity.  The firm of chartered accountants obtained the necessary information and documents relating to C Ltd as purchaser from Z (Suisse), which had been appointed to provide Corporate Management Services to C Ltd, and passed the data for drawing up the agreement under which C Ltd would purchase E BV to Dutch Bank Limited.  Mr W of Dutch Trust Company executed the purchase agreement for E BV’s shares on behalf of C Ltd under a power of attorney granted by a resolution by X Ltd as director of C Ltd; the purchase was approved in another resolution by X Ltd on 18 July.  The price was that specified by the firm of chartered accountants a few days earlier.  On the day before the sale E BV paid an interim dividend to A BV, an associated company of Dutch Trust Company.

124.	The next step was the transfer by C Ltd of 49.9 per cent of the shares in Holdings to E BV which had been planned for the day after the purchase by C Ltd of E BV.  The draft agreement was faxed by the firm of chartered accountants to Z (Suisse) on 19 July providing for the sale of the shares by C Ltd to E BV for £23.7 million to be financed by an interest free loan from C Ltd to E BV repayable on demand.  There was no documentation as to the basis of the price.  However £23.7 million was substantially less than a pro rata proportion of the latest bid of £72 million. The final form of the agreement with loan memorandum was faxed by the firm of chartered accountants to Z (Suisse) in Geneva on 23 July where two employees of Z (Suisse) executed it for X Ltd on behalf of C Ltd.  Mr F and Mr H of Dutch Trust Company were authorised to sign for E BV on 23 July and did so on 24 July.  

125.	The crucial date for this appeal was therefore 23 July 1996, being the date on which either or both E BV and C Ltd must have both been members of a non-resident group of companies if section 171 of the CGTA 1979 was to apply or, alternatively, the date on which both must have been members of a resident group. It is clear that they were members of a group, the issue is therefore whether the Appellants have shown on the balance of probabilities that both were non-resident or that both were resident.  It is also clear that the legal formalities were carried out abroad including both the meetings approving the transaction and the signing of the documents.

126.	Events subsequent to 23 July are only relevant insofar as they are evidence as to where the central management and control of E BV and C Ltd were on that date.

127.	On 13 and 14 August engagement letters with the firm of chartered accountants were signed by Dutch Trust Company on behalf of E BV. The next record of any communication between and either E BV or Dutch Trust Company was not until 30 September.  Meanwhile MNV were granted exclusivity until 13 September, clearance applications were submitted to the Revenue and an approach by NatWest Ventures was not taken up.

128.	Throughout the period from December 1995 negotiations had been continuing with MNV.  The firm of chartered accountants were acting for Mr R.  There is no record of any instructions from C Ltd and we infer that the firm of chartered accountants relied on Mr R’s letter of engagement (see paragraph 16).  Representatives of MNV visited the business on a number of occasions.  Successive offers “subject to contract” were made for the whole business.  We have no doubt that the prospective purchasers were aware of the fact that a substantial holding was held offshore.  It is not clear whether they were aware of the identity or indeed existence of C Ltd before the summer of 1996.  On 5 July the firm of chartered accountants sent an engagement letter for taxation services to be signed by Mr R and Z (Suisse); the latter company was of course providing management services to C Ltd.  We infer from Mr S’s letter to Z (Suisse) of 30 September (see paragraph 53 above) that Z (Suisse) had not been kept up-to-date regarding the negotiations : if they were the letter was very oddly phrased.  The inference must be that the firm of chartered accountants had not been in touch with C Ltd either.

129.	We now come back to the question of the central control and management of E BV on 23 July 1996 when C Ltd disposed of the shares in Holdings to E BV.  Prior to 18 July it is an agreed fact that E BV was a dormant Dutch company.  The only recorded action prior to 18 July was the declaration of a dividend on 17 July.  The company had no assets to manage apart from small cash balances.  Up to that time it can only have been resident in the Netherlands.

130.	On 18 July following the purchase of its shares by C Ltd, Dutch Trust Company became managing director and undertook responsibility for day-to-day management. It is clear that the appointment of Dutch Trust Company was at the behest of the firm of chartered accountants, see paragraphs 31 and 32 above.  In fact E BV was purchased from an associated company of Dutch Trust Company.

131.	Five days after the appointment of Dutch Trust Company E BV purchased from its new parent company, C Ltd, the shares in Holdings with the purchase price left outstanding as an interest free loan repayable on demand.

132.	There is no evidence that any consideration was given by Dutch Trust Company of the basis on which the price of £23.7 million was fixed.  There is no record of any explanation having been provided by the firm of chartered accountants who had produced the draft agreement containing that figure or of any advice being requested or given.  Neither is there any evidence of any consideration being given as to the price by C Ltd, by X Ltd its director or by Z (Suisse).  

133.	The only sources of information as to the value of the shares in Holdings would have been the company itself or the firm of chartered accountants who were conducting the sale negotiations.  Since no written information is contained in the extensive trial bundles, and this would have been covered by the disclosure direction referred to at paragraph 86 above, we conclude that no written information was provided.  In view of Witness 1’s evidence (paragraph 69) as to the reluctance of to advise on the terms of offers, there is no reason to believe that any oral advice was given as to the £23.7 million.  Witness 4 did not recall any advice (paragraph 75).  If any advice was given no record was kept.

134.	E BV was of course a wholly-owned subsidiary of C Ltd and had minimal cash resources.  The purchase of Holdings shares from its parent was financed by an interest-free loan from that parent.  It was not in any sense an arm’s length transaction.  From the viewpoint of E BV we find nothing surprising in the fact that its directors accepted the agreement prepared by the firm of chartered accountants and executed by X Ltd on behalf of C Ltd.  It would be a far-reaching proposition to state that any subsidiary entering into a contract to acquire property from its parent on such a basis without independent consideration of the terms is necessary ceding its central management and control to the parent.

135.	In the normal case however the subsidiary which has acquired an asset from its parent will thereafter carry on business on its own account making its own decisions, although having regard to the policy of its parent.  In such a case it would be unrealistic to isolate the initial transaction and conclude that the central control rested with the parent at that point but not thereafter.  Here however there was no business in fact other than holding the shares.  On 21 October 1996 C Ltd warranted that, apart from its interest in E BV, E BV’s shares in Holdings and the transactions in Holdings under the sale agreement, neither C Ltd nor E BV had an interest in other business.

136.	In the present case the only activity of E BV between its acquisition by C Ltd and the sale of its shares in Holdings was the acquisition and sale of the shares in Holdings and the matters connected therewith.  There was nothing else to manage.

137.	If the conduct of the sale of C Ltd’s shares in Holdings had indicated genuine involvement by Dutch Trust Company as director of E BV in the decision-making process that would have supported the contention that the central control and management was outside the United Kingdom both in October and indeed from July.

138.	We infer from Mr S’s letter of 30 September 1996 to Dutch Trust Company that there had been little or no contact between the firm of chartered accountants and Dutch Trust Company since 13 August (see paragraph 41 above).  There was no mention in the correspondence between them of the disclosure letter to the purchasers or to the audited accounts to 30 June 1996 both of which were subject to warranties by E BV.

139.	The recommendation by the firm of chartered accountants on 8 October 1996 contained no analysis or consideration of the warranties to be given by E BV.

140.	We accept that there were strong commercial reasons for E BV to accept terms for the sale of its shares in Holdings which were acceptable to Mr R and to the managers of the business.  Furthermore it is obvious that a refusal by E BV to accept terms acceptable to the other shareholders in Holdings and to the managers of the business would have created a difficult situation.  It is apparent that there was a considerable goodwill element in the price which was over twice the net asset value.  Damage to staff morale might have had serious implications for the value of E BV’s shares. To a considerable extent the decision made itself.

141.	However it does not appear that any real consideration was given by Dutch Trust Company at all.  The statement by Mr W (see paragraph 82 above) makes no mention of seeing the accounts of Holdings, the disclosure letter by the firm of solicitors or of the warranties.  If there had been any consideration of  these documents, we would have expected them to have been in Dutch Trust Company’s files and to have been mentioned in Mr W’s statement and included in the bundle.

142.	We conclude that although there were strong reasons for E BV to accept the offer to sell its shares in Holdings, no real consideration was given to the matter by Dutch Trust Company which simply fell in with the wishes of Mr R expressed by his advisors, the sale having been approved by its parent, C Ltd, which had agreed to enter into a guarantee.

143.	In reaching this conclusion we do not attach any real weight to the absence of the witnesses most of whom had moved jobs.  Evidence in December 2003 of events over seven years earlier would have been of limited value except in so far as supported by or based on notes or records at the time. Mr Brennan opposed a request for an adjournment because Mr W was unable to attend.  The statement of Mr W that due to the passage of time he could no longer specifically remember the events is wholly credible.  We would have been sceptical of evidence that he did recall events in detail.

144.	We considered Mr Tallon’s submission that if the central management and control of E BV was not exercised by Dutch Trust Company it was exercised in Geneva by Z (Suisse).  The difficulty about that submission is that the evidence of Witness 2 was that he could not speak for E BV which was managed by Dutch Trust Company and not by Z (Suisse).

145.	We conclude that the Appellants have failed to satisfy us that the central control and management of E BV was not in London from 18 July 1996 when C Ltd became its shareholder.   The only acts of management and control of E BV were the making of the board resolutions and the signing or execution of documents in accordance with those resolutions.  We do not consider that the mere physical acts of signing resolutions or documents suffice for actual management.  Nor does the mental process which precedes the physical act.  What is needed is an effective decision as to whether or not the resolution should be passed and the documents signed or executed and such decisions require some minimum level of information. The decisions must at least to some extent be informed decisions.  Merely going through the motions of passing or making resolutions and signing documents does not suffice. Where the geographical location of the physical acts of signing and executing documents is different from the place where the actual effective decision that the documents be signed and executed is taken, we consider that the latter place is where “the central management and control actually abides.”  

146.	This raises the question of where the place of effective management was situated.  We accept Mr Brennan’s submission at paragraph 103 that in the present context there is no difference between central management and control and the place of effective management. In our judgment the place of effective management must be the place where effective management decisions are taken. There is no indication that any effective management decisions were taken in the Netherlands.

147.	We conclude therefore that the Appellant has not established that E BV was not resident in the United Kingdom for tax purposes.

148.	This brings us to Mr Tallon’s alternative submission that if E BV was resident in the United Kingdom so also was C Ltd.

149.	As to this it is necessary to ask where X Ltd as director transacted its business and executed its powers as such.  Being sole corporate director it did not have meetings. Although C Ltd was resident under British Virgin Islands law in the British Virgin Islands, it is clear that it was not managed there.  It was incorporated by the trustees of the settlements set up by the Appellants in accordance with the proposals of the firm of chartered accountants.  The firm of chartered accountants had suggested Z (Suisse) as trustees of the settlements and as directors of the non-resident company (see paragraph 22).  The sole subscriber to C Ltd was an associated company of Z (Suisse) and a wholly owned subsidiary company of Z (Suisse), namely X Ltd, was appointed as sole director. X Ltd then appointed Z (Suisse) to provide corporate management services. The administrative office of C Ltd was at the address of Z (Suisse) in Geneva, see paragraph 25.  Z Bank (Suisse) SA, the parent of Z (Suisse), was appointed as bankers of C Ltd and any two authorised officers of Z (Suisse) signing jointly were given power to operate the account.  The notarised transfer of shares in E BV to C Ltd recorded the principal place of business of C Ltd as Geneva.  We are satisfied that those powers which were exercised by X Ltd as director of C Ltd were exercised by it in Geneva even though X Ltd was incorporated in the British Virgin Islands.

150.	That however leaves the question of the extent to which X Ltd actually exercised its powers and whether the central management and control of C Ltd was actually in the United Kingdom.  As to this the burden of proof is on the Appellants.

151.	There is no reason to believe that the decisions taken in October 1995 recorded at paragraph 24 were actually taken in the United Kingdom. 

151.	The initiative for interposing a Dutch holding company, E BV, between C Ltd and Holdings came from the firm of chartered accountants acting for the Appellants (see paragraph 30).  On 5 July 1996 the firm of chartered accountants wrote that only Mr R and Z (Suisse) would have authority to give instructions for Project Marvel.  The arrangements for the acquisition by C Ltd of E BV were made by the firm of chartered accountants with Z (Suisse).  The firm of chartered accountants informed Z (Suisse) of the purchase price and the proposed management arrangements and arranged for Z (Suisse) to send the necessary documents to Dutch Trust Company.  On 18 July a draft of the stock purchase agreement for E BV was sent by Z (Suisse) to Dutch Trust Company initialled on behalf of C Ltd.

152.	On 19 July the draft purchase agreement for the purchase by E BV of the shares in Holdings from C Ltd was sent by the firm of chartered accountants to Z (Suisse), see paragraph 39.  The agreement was signed without amendment apart from insertion of the date.  The agreement executed by X Ltd on behalf of C Ltd was sent by Z (Suisse) by courier to Dutch Trust Company.

153.	There is no sign of the material information necessary to enable X Ltd as director of C Ltd to make decisions being provided to X Ltd by the firm of chartered accountants.  Nor is there any evidence of such information being provided by the firm of chartered accountants to Z (Suisse), the communications being solely directed to the mechanics of the transaction.  We consider on the balance of probabilities that it was not provided.  Any such material would clearly have been covered by the disclosure direction (see paragraph 86).

154.	There is no record of any communication between the firm of chartered accountants and Z (Suisse) between 24 July (see paragraph 40) and 30 September (paragraph 53).  The letter of 30 September to Z (Suisse) enclosed a copy of the letter of that date to Dutch Trust Company (see paragraphs 49 to 53 above). There is no evidence that any information was given to C Ltd or X Ltd which was not given to Dutch Trust Company.  It is to be noted that the resolutions by X Ltd on 17 October 1996 (see paragraphs 59 and 60 above) were signed by Mr I and Miss A of Z (Suisse).

155.	One of those resolutions involved C Ltd entering into a Guarantee of E BV’s obligations under the sale agreement (see paragraph 67), the other involved approval of the sale agreement.  The Appellant’s argument must be that if the real decision by E BV to enter into the sale agreement was taken not by itself but was taken by the firm of chartered accountants on its behalf in London, it is illogical to conclude that the decisions made by or on behalf of C Ltd were not also made by the firm of chartered accountants in London and that if the decision by C Ltd to approve the sale agreement by E BV was in reality made by X Ltd or Z (Suisse) on behalf of C Ltd in Geneva, it would be inconsistent to conclude that the decision by E BV was made for it in London rather than in Geneva or the Netherlands.

156.	Mr Brennan’s submissions as to the residence of C Ltd were based on the burden of proof.  He said that there was no evidence as to activities of C Ltd other than those involving the transactions involving the shares in Holdings and E BV.  We do not accept this since the guarantee to Group Ltd (paragraph 67) involved a warranty that C Ltd had no interest in any other business.  This is in no way surprising since, until the sale in October 1996 when C Ltd received £23.7 million from E BV in respect of the loan, the only assets of C Ltd were the shares in Holdings, the shares in E BV and the indebtedness of E BV. C Ltd had no other assets to manage.  However on the footing that the actual place of management is the place where the decisions are actually taken, it is for the Appellant to show that C Ltd did not have the necessary material on which to take the decisions.  The fact that there is no documentary evidence that they had the necessary material does not show that they did not have that material. Witness 2’s evidence was that they followed the advice of the firm of chartered accountants having also taken advice from Messrs Lenz and Staehelin who reviewed the draft sale agreements.  This was not challenged.

157.	There was no statement or evidence from any witness as to the performance by X Ltd of its functions as director.

158.	In the light of the evidence the Appellant has not satisfied us that X Ltd did not form its own view on the recommendations received from the firm of chartered accountants.  The mere fact that C Ltd did what it was recommended to do does not mean that it must follow that its control and management were not where the sole director transacted the business of the company so long as the sole director exercised an independent judgment coming to a decision.  There is no evidence that X Ltd would not have refused to carry out an improper transaction.

159.	We therefore conclude that the Appellant has not shown that C Ltd was resident in the UK.

160.	Section 50(6) of the Taxes Management Act 1970 provides that an assessment stands good unless we are satisfied that the appellant is overcharged.  In order to succeed the Appellant had to satisfy the Tribunal either that both E BV and C Ltd were not resident in the United Kingdom at the time when the shares in Holdings were transferred from C Ltd to E BV or that both companies were resident.  Their main argument was that both E BV and C Ltd were non-resident.  Having failed to establish that E BV was not resident in the United Kingdom, there was a real difficulty in establishing that C Ltd was so resident in circumstances when the evidence was designed to establish the reverse proposition.  The Appellant failed to overcome that difficulty.

161.	The result is that the assessments stand and the appeals are dismissed.

THEODORE WALLACE

DR NUALA BRICE
SPECIAL COMMISSIONERS

RELEASED 18/05/2004

SC 3077-8/02
££R &amp; Anor v HM Inspector of Taxes [2004] UK SPC00422 (18 May 2004)