Terence Murphy & Ors v The Commissioners for HMRC [2025] UKFTT 1503 (TC)

“(1) Income or gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 7 and situated in the other Contracting State or from the alienation of shares in a company the assets of which consist wholly or principally of such property may be taxed in that other State. (2) Income or gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such income or gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State. (3) Income or gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. (4) Income or gains from the alienation of any property other than that referred to in paragraphs (1), (2) and (3) of this Article, shall be taxable in the Contracting State of which the alienator is a resident.” (Emphasis added.)

“(1) For the purposes of this Convention, the term “resident of a Contracting State” means, as the context requires: (a) any person who is resident in the United Kingdom for the purposes of United Kingdom tax; or (b) any person who is resident in New Zealand for the purposes of New Zealand tax. … (3) Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. (a) any person who is resident in the United Kingdom for the purposes of United Kingdom tax; or (b) any person who is resident in New Zealand for the purposes of New Zealand tax. The test in article 4(3) is commonly referred to as the “tie breaker”

“the trustees of a settlement shall for the purposes of the TCGA [i] be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the trustees) and [ii] that body shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom.” (Emphasis and numbering added.)

“...a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom...” (Emphasis added.)

“(a) in a year of assessment chargeable gains accrue to the trustees of a settlement from the disposal of any or all of the settled property, (b) after making any deductions provided for by section 2(2) in respect of disposals of the settled property there remains an amount on which the trustees would, disregarding section 3 (and apart from this section), be chargeable to tax for the year in respect of those gains, and (c) at any time during the year the settlor has an interest in the settlement,” (ii) sub-s (2) provides that “the trustees shall not be chargeable to tax in respect of the gains concerned but instead chargeable gains of an amount equal to that referred to in subsection (1)(b) above shall be treated as accruing to the settlor in the year”. (4) If the appellants are correct that article 14(4) applies, it is given effect as follows: (a) Section 277 TCGA provides that s 788 ICTA, which gives relief from UK income tax (and corporation tax) where applicable under a double tax agreement, applies to arrangements for the purposes of giving relief from CGT on capital gains in the same manner as it applies to arrangements for the purposes of giving relief from income tax. (b) Section 788(3) ICTA provides that tax relief arrangements in double tax agreements “shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide– (a) for relief from income tax, or from corporation tax in respect of income or chargeable gains…”. (c) Section 788(6) ICTA provides that “except in the case of a claim for an allowance by way of credit…a claim for relief under subsection (3)(a) above shall be made to the Board.”

“In our judgment, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight. The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself.”

“(1) Subject to any provision in the Taxes Acts for a claim to be made to the Board, every claim shall be made to an officer of the Board. … (3) A claim shall be made in such form as the Board may determine. (4) The form of claim shall provide for a declaration to the effect that all the particulars given in the form are correctly stated to the best of the information and belief of the person making the claim. (5) The form of claim may require - (a) a statement of the amount of tax which will be required to be discharged or repaid in order to give effect to the claim; (b) such information as is reasonably required for the purpose of determining whether and, if so, the extent to which the claim is correct; (bb) the delivery with the claim of such accounts, statements and documents, relating to information contained in the claim, as are reasonably required for the purpose mentioned in paragraph (b) above; and (c) any such particulars of assets acquired as may be required in a return by virtue of section 12 of this Act or paragraph 13 of Schedule 18 to the Finance Act 1998. …” (Emphasis added.)

“A reference to the Commissioners of the Inland Revenue shall be taken to mean a reference to the Commissioners for Revenue and Customs, HMRC” and (2) s 13(1) of that Act provides that: “An officer of Revenue and Customs may exercise any function of the Commissioners.”

“On this analysis the making of a claim serves no other purpose than that of alerting the Inspector to the fact that reliefs are to be sought by the claimant.”

“cannot have been under any misapprehension as to the existence of a group or that the Appellant was claiming reliefs anticipated to be available within the group to an extent necessary to extinguish the tax liability on its profits. Indeed the correspondence shows that he so understood the position and, as Vinelott J. observed in the course of his judgment ([1989] STC 354, 362), the combined effect of the documents sent to the Inspector was precisely the same as if the accounts had been accompanied by a letter saying: “We hereby claim group relief under s 258(1) in respect of the full amount of the profits of the taxpayer company for the accounting period to 31 March 1982, being the amount shown in the profit and loss account”.”

“construes the equivalent statutory time provision in respect of group relief claims as favourably as conceivable to the taxpayer but suggests there is required “at least…a claim by an identified claimant company to relief against identified or identifiable profits for an identified accounting period….The taxpayers’ estimates did not achieve that here: a claim is not made at least until the Revenue is able to recognise it as such.”

“99.…It was common ground that we should give the letter the meaning it would convey to a reasonable HMRC officer having all the background knowledge which would reasonably have been available.” “103…We accept that labels are not determinative…” “110. It is also relevant that there is no such thing as a claim for exemption. The income is either exempt under section 208 ICTA 1988 or it is chargeable. It is then included or omitted from the return and the computation of tax accordingly. If it is included, an appropriate claim for relief by way of credit must be made. The purpose of a claim is to give notice to HMRC of what is being claimed and in what amount. If a taxpayer does not state what is being claimed, then it cannot be said to have made a claim. Unless the taxpayer indicates that it is claiming credit, it is not entitled to credit. In our view, the Taxpayer cannot say one thing and be treated as saying another merely because it produces the same result. That was the point being made by Lewison LJ at the end of [30] in BTPS. We cannot see how a document which seeks repayment of tax on the grounds that foreign dividends are exempt can be construed as a claim for credit on the basis that they are taxable.” (Emphasis added.)

“…whilst there are no particular formalities for a claim to a DTR credit, it must as a minimum convey to HMRC the nature of what is being claimed (compare, in a different context, Lord Oliver's comments about the then limited requirements for a valid group relief claim in Gallic Leasing Ltd v Coburn (Inspector of Taxes) [1991] 1 WLR 1399, [1991] STC 699, especially at p.1406E-G). As the UT indicated at [103], it is necessary to consider how a reasonable officer of HMRC would understand the letter. The answer to that is obvious. It would be read as a claim to repayment of tax on the basis of an exemption, not a claim to a DTR credit which would (if validly made) entitle the claimant to a repayment of tax. The fact that the practical effect of an exemption in terms of the tax repayable could well be the same as a credit at the FNR makes no difference to the nature of the claim.” (Emphasis added.)

“We accept HMRC’s submission that they are entitled to know that a claim to DTR is being made and the amount which is being claimed. However, in circumstances where the provisions do not identify any additional level of detail to be included in a claim, we cannot read any further requirement into the provisions. There are various forms of DTR described in Part XVIII ICTA 1988, and they are all reliefs which mitigate the effects of double taxation, whether it is juridical double taxation or economic double taxation. We agree with Mr Bremner that a claim for DTR encompasses all types of double taxation. Hence, if a company claimed treaty relief when it ought to have claimed unilateral relief, or vice versa, we cannot see anything to suggest it should be denied relief because of that error. Similarly, if a company limits its claim to WHT when it could have claimed relief for underlying tax, there is no reason it should not make a supplementary claim which is within time. It would not need to make a new, separate claim.”

“while it need not be quantified correctly, a claim to HMRC must indicate what is being claimed, not least so that HMRC are able to determine whether or not to accept it without enquiry. If a taxpayer chooses to claim credit for withholding tax, and as in that case makes it clear that that (alone) is what it is claiming, that cannot sensibly be treated as a claim that extends to anything else.” (Emphasis added.)

“HMRC would then be obliged, on closing an enquiry, to allow credit for all DTR that could legitimately have been claimed on any income, even though the actual claim was not in fact contemplated by either party, and could not reasonably be understood, as extending beyond a claim to withholding tax credits on specified dividends”

“99. In my judgment, it is necessary to look closely at the statutory provisions to resolve this question. Paragraph 54 provided, as set out above, that a claim “under any provision … for a relief … must be for an amount which is quantified at the time when the claim is made”

“Section 8A of TMA requires a return by the trustees of certain information “for the purpose of establishing the amounts in which the relevant trustees of a settlement, and the settlors and beneficiaries, are chargeable.”

“A settlor may be able to claim exemption on some or all of the attributed trust gains, but this depends on the terms of the particular double taxation agreement.”

“(i) It is not enough that the common assumption upon which the estoppel is based is merely understood by the parties in the same way. It must be expressly shared between them. (ii) The expression of the common assumption by the party alleged to be estopped must be such that he may properly be said to have assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely upon it. (iii) The person alleging the estoppel must in fact have relied upon the common assumption, to a sufficient extent, rather than merely upon his own independent view of the matter. (iv) That reliance must have occurred in connection with some subsequent mutual dealing between the parties. (v) Some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position.”

“It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption…It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.”

“On the facts of that case, the parties to a share sale agreement had conducted themselves on the incorrect assumption that there was no earlier shareholder’s agreement by which any sale of the shares first had to be offered to existing shareholders. The parties had forgotten about an earlier shareholders’ agreement conferring pre-emption rights. It was held that estoppel by convention applied. The parties had conducted themselves on the basis of a common assumption that there were no valid rights of pre-emption and it would be unconscionable to allow the directors to go back on that assumption. While citing Briggs J’s principles with apparent approval, Hildyard J, giving the judgment of the court, at para 92, made clear in relation to the first principle that “something must be shown to have ‘crossed the line’ sufficient to manifest an assent to the assumption.”

“[51] It may be helpful if I explain in my own words the important ideas that lie behind the first three principles of Benchdollar. Those ideas are as follows. The person raising the estoppel (who I shall refer to as “C”) must know that the person against whom the estoppel is raised (who I shall refer to as “D”) shares the common assumption and must be strengthened, or influenced, in its reliance on that common assumption by that knowledge; and D must (objectively) intend, or expect, that that will be the effect on C of its conduct crossing the line so that one can say that D has assumed some element of responsibility for C’s reliance on the common assumption. [52] It will be apparent from that explanation of the ideas underpinning the first three Benchdollar principles that C must rely to some extent on D’s affirmation of the common assumption and D must (objectively) intend or expect that reliance. This is in line with the paragraph from Spencer Bower, The Law Relating to Estoppel by Representation, 4th ed (2004) p 189, which was cited by Briggs J just before his statement of principles: “In the context of estoppel by convention, the question here is whether the party estopped actually (or as reasonably understood by the estoppel raiser) intended the estoppel raiser to rely on the subscription of the party estopped to their common view (as opposed to each, keeping his own counsel, being responsible for his own view).” … But this is not to suggest that C must be relying solely on D’s affirmation of, or subscription to, the common assumption as opposed to C relying on its own mistaken assumption. It is sufficient that, as D intended or expected, D’s affirmation of, or subscription to, the common assumption strengthened, or influenced, C in thereafter relying on the common assumption.” “In the context of estoppel by convention, the question here is whether the party estopped actually (or as reasonably understood by the estoppel raiser) intended the estoppel raiser to rely on the subscription of the party estopped to their common view (as opposed to each, keeping his own counsel, being responsible for his own view).”

“the analysis of the question of injustice or unconscionability assumes an altogether different aspect. The Revenue could have taken steps to protect those claims from becoming statute barred either by issuing protective claim forms or by seeking to make effective tolling agreements with the relevant employers. Those NIC claims did not therefore become statute barred by virtue of the Revenue’s reliance upon the shared assumption.” (4) At [63] he noted that HMRC submitted that (a) the fact that HMRC’s decision in September 2001 to take no further steps meant that taxpayers who had participated in the scheme continued to enjoy in full the benefit which they anticipated that they would receive, namely not being made the subject of protective recovery proceedings while liability to pay the NICs remained in issue in the statutory appeals process, and (b) in cases where the receipt of the anticipated benefit made it unjust for the recipient to resile from the shared assumption, the fact that a case in detrimental reliance could not also be established was neither here nor there. He concluded that it was not on balance unfair, unjust or unconscionable for taxpayers in these circumstances to assert a limitation defence to those claims, arising out of HMRC’s decision not to protect them once aware of the true legal position for the following reasons: 64. In my judgment, questions of injustice or unconscionability must be addressed in the round, and due weight given to all relevant factors. In that context the following observations of Neuberger J in the PW & Co v. Milton Gate Investments case, (supra) at paragraph 222 are of real force: “In almost all cases, such unconscionability must be based on the prejudice which would be caused to the claimant if the strict legal position applied. As I see it, the claimant must also establish that that prejudice arises from its reliance upon the convention. In other words, the court generally must be satisfied that (a) the claimant will suffer real prejudice, and (b) the prejudice arises from its reliance (upon) the convention. It should be emphasised that, even if the claimant satisfies these criteria, there may be no estoppel, because there may be other, more powerful, factors pointing the other way.” 65. In the present cases, in relation to claims which became statute barred only after September 2001, the prejudice occasioned to the Revenue by the loss of the ability to pursue those claims was in no sense reliant upon the convention. The Revenue had been advised in terms that the acknowledgements and part payments did not have the effect assumed by the convention, and knew that, nonetheless, those claims could still be saved by the taking of prompt protective steps…. 67. While I recognise that the continued enjoyment by employers of the benefit (i.e. not be sued) which they sought to obtain from providing the acknowledgements and part payments on the shared assumption as to their effectiveness is a relevant element to be considered on the question whether it would now be unjust, unfair or unconscionable for them to rely upon the true legal position under section 29(5), it is in my judgment a relatively modest factor, in particular when compared with the Revenue's decision not to protect claims which it knew could have been protected by other means. In relation to those claims, the Revenue was, quite simply, the author of its own misfortune.” (Emphasis added.)

“I infer that gains were made by the Trustees in the period [when the trust was not resident in the UK] and that the Trustees believe that any such gains are exempt from UK Capital Gains tax under the provisions of Article 14(4) of the [treaty] on the basis that the Trustees were resident in [NZ] when the gains were realised.” (b) He also explained that he believed the residency tie-break provision in Article 4(3) would “come into play” and asked for documents and information to allow him “to determine where the Trustees [sic] place of effective management was during 1999/00”

“As the trustees were resident during part of 1999/2000 they are chargeable on all the gains realised by them in that year subject to any successful claim they may have to DTA relief and subject to the provisions of [s 77]. I need the information I have requested to determine whether treaty relief is available to the trustees. But I also need to check whether the trustees did in fact cease to be resident in the UK as they have claimed in order to check whether Section 80 TCGA 1992 applies to the trustees.” (4) On 6 August 2001, Mr Robertson sent an information notice to Funcode (under s 19A TMA) seeking much of the information that had been requested in the letter of 11 May 2001 which Funcode provided on 29 August 2001. (5) On 13 September 2001, Mr Robertson wrote to Funcode saying: “The No. 2 trustees have not returned any gains in their 1999/00 Self Assessment Return, presumably on the basis that the taxing rights for the gains are allocated to [NZ] under the [treaty]. The No. 2 trustees were residents of the UK for the purposes of the DTA in 1999/2000 and I need to clarify for the purpose of considering any claim under the [treaty] whether or not the No. 2 Trust was a resident of [NZ] for the purposes of the [treaty] at the time the disposals were made.”

“seeking clarification on the contents of the letter from the Greymouth Branch Office of the [NZ] Revenue as it appears to conflict with other guidance received from the [NZ] Revenue concerning the application of their domestic tax code to trusts with [NZ] resident trustees.” (8) On 6 February 2002, Funcode wrote to Mr Robertson asking for a copy of the communication with the NZ Inland Revenue. (9) On 20 February 2002, Mr Robertson replied saying that: “Article 25 of the [treaty] allows for exchange of information between the competent authorities of each contracting State for the purposes of carrying out the provisions of the Agreement”. (10) Following further correspondence, on 26 April 2002, Mr Robertson wrote to Funcode saying: “As I explained in my letter of 20 February 2002, I am waiting for clarification from the [NZ] competent authority of the tax status of trusts in [NZ] as I need that information to decide on your client’s claim for relief under the terms of the [treaty]. This is because the letter written by the Gremouth [sic] District Office appears to be at variance with our understanding of the tax treatment of trusts in [NZ].” (11) On 21 July 2003, Mr Robertson wrote to Funcode saying: “I apologise again for the delay but I can now confirm that I accept that the [O] Trust was a resident of [NZ] for the purposes of the [treaty] at the time of chargeable disposals by the trustees. The Trust was also a resident of the UK for the purposes of the Treaty place of effective management.” (12) Mr Robertson sent letters in near identical terms to the trustees of other settlements in August 2003. Since then, HMRC have accepted that the trusts advised by Lansburys that appointed NZ resident trustees were resident in NZ during the trustees’ appointment. (13) On 5 August 2003, Funcode wrote to Mr Robertson noting that he “now accept[ed] the Trust was a resident of [NZ] for the purposes of the [treaty] at the time of disposals by the Trustees”. (14) On 28 August 2003, Mr Robertson replied to Funcode saying: “In order to obtain the benefit of the Treaty the Trust has to show firstly that it was a resident of [NZ] for the purposes of the [treaty]. Secondly if it is a resident of [NZ] it has to show that if as I contend it is also a resident of the UK for the purposes of the Treaty the tie-break clause awards taxing rights to [NZ]. If the Trust was not accepted by [NZ] as a resident of [NZ] for the purposes of the Treaty then any gains realised by the trustees in 1999/2000 would have been chargeable gains of the trust and a like amount would have been assessable on the settlers under Section 77 TCGA 1992. That was why it was necessary for me to establish first of all whether or not the Trust was a resident of [NZ] for the purpose of the Treaty and then when that was established to consider the application of the tiebreaker.” (15) Throughout the rest of 2003 and most of 2004, Funcode and Mr Robertson continued to correspond about the effect of the treaty on the O Trust. (16) On 16 January 2004 Funcode requested that Mr Robertson set out all his arguments He agreed to do so. This was followed by a chaser from Funcode. Mr Robertson then apologised for the delay in providing “a comprehensive explanation of the Revenue’s views on the facts of this case and the issues raised by them”

“We note that you now accept the Trust was resident in New Zealand for the purposes of the [treaty] at the time of the disposals by the Trustees. You say “the Trusts were also residents of the UK for the purposes of the Treaty and so their Treaty residence is decided under Article 4(3) by the location of the place of effective management”

“However certain of the information requested in my letter of 19 December 2002 is I think relevant to considering the Treaty claim irrespective of the effective management point. I believe that… I hope that you will now feel able to supply all of the information requested but without prejudice to the remainder of the Appendix can I please have the information requested in paragraphs 1, 2 and 7 of the Appendix to the letter of 19 December 2002 as it is necessary to support the trustees’ claim that because of the operation of the Treaty there were no chargeable gains in the year ended 5 April 2001.” (Emphasis added.)

“With reference to your memo of 23 December 2003, a Further Assessment has today been issued with respect of estimated Capital Gains of £840,000.” (11) On 27 January 2004, Allglory wrote to Mr Robertson challenging the additional point he had made in his previous letter and said: “So that this enquiry is not unduly protracted can we suggest that in your reply you set out all arguments you wish to make in this matter with technical reasons so that they can be dealt with at the same time.” (Emphasis added.)

“I agree that the best approach would be if I set out in detail what liabilities I believe fall on your client and the reasons for those liabilities. In order to make that statement as comprehensive as possible I am consulting with colleagues and I will write to you again in due course.” (14) On 16 February 2004, Mr Robertson sent a memo to J F Lye in which he referred to the fax dated 6 January 2004 and confirmed he had received an appeal against the assessment raised in respect of the tax year ended 5 April 2001 and asked for the tax charge of £333,120 to be stood over. (15) On 29 July 2004, Mr Robertson wrote to Allglory setting out the arguments on which he was relying. The introductory section of the letter includes the following: “A charge to capital gains tax arises on the trustees under Section 2 Taxation of Chargeable Gains Act 1992 subject to Section 77 TCGA from the sale of their holding of GED Technology Group shares. The trustees claim that the gain is not a chargeable gain as they were resident in [NZ] at the time of the disposal so that under the terms of the [treaty] only [NZ] can tax the gain.” (Emphasis added.)

“I think the essence of your letter is why was 1) any gain on the disposal of Mr Harris's No. 1 settlement’s holding of 249 shares in GED for 45,427 shares in Sitec and cash of £840,400 not a chargeable gain; and 2) any gain on the appointment of Mr Harris's No. 1 settlement’s holding of 45,427 shares in Sitec to Mr Harris's 2001 settlement not liable to CGT in the hands of Mr. Harris. The answer is that at the time of the disposal and appointment above the No 1 settlement was tax resident in [NZ] and under the terms of the [treaty] the gains could only be taxed in [NZ] and could not be imputed through to Mr. Harris.”

“We refer to the Form 50FS (2002) sent to you on 3 December 2002 and note we have not received a tax return for 2001/02”

“I didn’t believe a claim was necessary as long as the information was available…on tax returns.”

“would be selected through which information would be supplied to test the place of effective management argument under the [treaty]. If, in the light of all relevant evidence, DC could concede that the place of effective management had been in NZ while the trustees were resident there, the point could be conceded on all similar cases.” (4) Mr Wood proposed an agreement to proceed with a test case covering all “the trusts which had exploited the [treaty]”

“The points at issue common to the UK/NZ schemes were: - [1. A point relating to trusts that had been in the UK before the planning and which is therefore not relevant to the appellants.] 2. Interpretation of Article 4(1) of the DTA – does Article 4(3) apply? 3. If Article 4(3) does apply, where was the place of effective management while the trustees were based in NZ” (5) After initial hesitation, Mr Bentley accepted that the “trusts which had exploited the [treaty]” would have included the appellants’ trusts. He did not accept that if Mr Wood had been concerned with the claims issue it would have been described as another point at issue common to all the UK/NZ schemes. He said that (a) “they went very quickly into discussion about the application of the [treaty]”, and the technicalities. He could not see that there had been a forensic analysis done of the returns and at some point there would have needed to have been that kind of forensic assessment so they could point to a document that was a claim, (b) that analysis happened when he took over the enquiry, and (c) this is an avoidance arrangement. The discussion appears to have proceeded on the basis of an assumption that it had been implemented correctly, but when it comes to avoidance it is not unreasonable for HMRC to check on implementation and that is where there appears to have been a failing in these cases. He accepted that the impression a reader would have from the notes of the meeting is that there was no procedural issue with relief under the treaty at that time, and Mr Wood did not take any such issue in the following correspondence. He added that until an enquiry is closed points can arise. It appears that at this point, as HMRC were dealing with the RTW planning implemented by Lansburys’ clients in the round and identifying a lead case, they were not specifically focussing on issues such as whether formal claims had been made in particular cases. However, it is again apparent that they were proceeding on the basis that the only issue, as regards the RTW planning, was the application and interpretation of article 4 of the treaty. (6) On 7 November 2005, Mr Wood wrote to Lansburys agreeing to proceed with a test case (Mr E). He asked for information to allow him to come to a view on the POEM of the E Trusts. Mr Morris referred specifically to this letter in his witness statement noting that HMRC set out the issues in this letter and none of them referred to procedural steps. (7) On 17 November 2005, Lansburys confirmed to Mr Wood that they were collating the requested information. (8) On 13 January 2006, Mr Wood wrote to Lansburys thanking them for the documents he had received and asking for more information relating to POEM. (9) On 31 January 2006, Mr Blower wrote to HMRC to ask for confirmation of his understanding of the November meeting. He said “you confirmed you wish to raise only three technical points, namely ...” none of which related to procedural issues/claims. Mr Bentley first said that the claims issue was a “non-technical point”

“for your information - 1. On 1 March 2002 the non-resident trustees of the settlements of the above individuals retired in favour of trustees tax resident in [NZ]. 2. On 20 March 2002 the [NZ] trustees sold their holdings in non-resident companies wholly owned by them for market value to an arms-length purchaser. 3. On 3 April 2002 the [NZ] trustees retired in favour of UK tax resident trustees. We think you will gauge from the above why in our opinion Section 739 ICTA 1988 does not apply to the above individuals for 2002/03. As we are already in correspondence regarding what effective management means as regards trustee corporations under the [treaty] can these cases be left in abeyance pending the outcome of a case you are taking to the Special Commissioners later this year under the Mauritius/UK double tax treaty. You are already well versed in our arguments as to why chargeable gains realised by [NZ] resident trustees are not liable to CGT (or more correctly cannot be imputed through to the relevant settlors).”

“Whatever our opposing views of the application of the [treaty], we can I [sic] agree I think that the facts are crucial to determining the matter” and he requested documents clearly intended to address POEM of the trusts. He concluded: “Please note that the time limit for the making of an assessment for 2001/02 expires 31 January 2008. I propose, therefore, to make shortly a Capital Gains Tax assessment for that year on the basis that S86 TCGA 1992 will apply to the gain realised by the trustees.”

“1. The assessment is invalid as it has been issued out of time. 2. If not invalid is excessive as any chargeable gain would be considerably lower, and 3. In any event the chargeable gain is not liable to capital gains tax under the provisions of [the treaty] for reasons well known to HMRC and which are the subject of communication with Peter Wood...”

“why carry on all these years…if you believe there was no claims? We've wasted 20 years, 25 years of my life”

“In his letter of 2nd September 2008, your predecessor confirmed that if the taxpayers win the “time of disposal” residence argument in the Smallwood case the taxpayers win in the New Zealand cases.”

“A predecessor of yours Peter Wood stated - “the points of contention between us in the [NZ] cases are - 1. Article l4(4) – whether the trustees were resident in [NZ] only at the time of alienation or whether Article l4(4) has no application in a case of serial residence in both contracting states and cannot deny the country of residence taxing rights. Any double taxation arising can be relieved under Article 22. 2. If neither of the above applies, whether the trustees were indeed resident with the meaning of Article 4(3); 3. If so the place of effective management of the trust under Article 4(3). If either side wins on 1 that will decide the matter for all DTA schemes without recourse to 3. 2 is particular to NZ cases but will only be relevant if neither of the arguments at 1 are accepted. If you win on 2, 3 will be irrelevant.””

“The trustees of both settlements claim that their respective disposals are exempt from capital gains tax under the [treaty].” (Emphasis added.)

“As you will appreciate from previous correspondence, the Revenue view is that your clients have made a claim and it is for them to show to the Revenue that the point of effective management is NOT IN THE UK.” (Emphasis added.)

“We are of the opinion that Point [sic] of Effective Management (POEM) has to be considered in the cases for which Lansburys are the accountants…we now need to consider all of your clients’ claims under the DTA that the POEM of their trusts was not the UK.” (Emphasis added.)

“I refer to earlier correspondence with your agent in respect of a claim for relief under the [treaty] in relation to gains that arose in trusts for which you are the settlor.”

“we consciously believed, based on…all the letters that flowed for all that long period that claims had been made. They may not have been made in the form that…HMRC think they should be, but they were definitely accepted as such...by the inspectors dealing with the case”

“[Mr Callaway] passed over copies of Returns covering the [E] cases and said he could not identify where a claim to DTA had been made. [An HMRC officer] confirmed that a claim was required. [Mr Callaway] suggested that if the claim ought to have been made by the Trusts on departure then it ought to have been repeated on the Settlor’s Return as part of the necessary disclosure (to put HMRC ‘on notice’ as to what was taking place and why no Section 77 gains were being reported). [Mr Morris and Mr Ewart] will review the position.” (12) On 8 January 2013, Mr Callaway wrote to Lansburys setting out the “Action Points” that he understood had been agreed at the 13 November 2012 meeting which included: “8. You will review & report on the position of DTA claims made by the Trusts and Settlors.”

“TM expressed his concern about the way HMRC had handled matters. He pointed out that he had sent all of the documents and details his clients could get and he had also provided CGT computations. TM went on to say that he had not heard back from HMRC on these matters for a very long time. He said as far as he was concerned he did everything HMRC had asked. He added that a test case originally identified in 2005 should have been taken forward to test Lansbury’s [sic] contentions concerning the different DTAs. He pointed out that had this been done we wouldn’t be in the position now. TM stressed that his clients had been treated unfairly by HMRC. CW agreed that he’d come to the same conclusion when completing the reviews and apologised on behalf of HMRC. JB echoed CW’s comments and agreed that the case had not been handled correctly. CW went on to say that HMRC had missed opportunities to progress the cases and this fell short of what the clients might expect. JB confirmed that HM wanted to avoid any more loss of momentum and move forward with this case, and is committed to move these cases towards settlement. JB said that in HMRC’s view if it’s accepted that there’s no difference in the DTAs ultimately it comes down to POEM. TM commented that after seeking advice if he needs to reconsider POEM then he will do so then see where we differ adding CW commented that from his review the detailed issues were covered but not agreed.”

“the consequences may be that you avoid tax, but I see it as tax planning, which never used to be frowned upon”

“[Mr Bentley] said that by agreeing [Mr Morris’] position on the options it leads to considering the NZ DTA” (b “[Mr Bentley] said that in HMRC's view if its [sic] accepted that there's no difference in the DTAs ultimately it comes to POEM” “[Mr Bentley] said that in his view the cases will come down to POEM in the end” “[Mr Bentley] added that regardless of whether the shares have been sold there will be occasions of charge in most cases which will give rise to CGT so the matter boils down to POEM and when these occurred”

“Having reviewed correspondence over the last 15 years it is clear HMRC were fully aware of what claims were being made, the treaty issues involved and how they impacted the trusts and settlors.”

“These are the issues but we reserve our position.”

“Neither I nor Lansburys more generally were controlling the transactions.”

“Basically it was an integral part of the planning but it didn’t always go to the plan”

“It was explained to them, always, and they never raised any doubts or the need to take independent advice.”

“of course the beneficiaries always rely on professional advice…when I say "always", they frequently would rely on professional advice when it comes to tax planning. Most beneficiaries would not have the expertise…Our overriding consideration, given that we were a trustee, clearly was to do the best job we could for the beneficiaries of the trust to which we were appointed…I think that was the overriding factor rather than the tax implication…I’m not an expert in foreign tax. Our number one priority was always to be seen to do the correct thing by the beneficiaries, I mean that was the nature of our appointment…and we certainly did take it seriously, which I think you have to do.” (7) He was asked how he decided that selling the assets and entering into that sale and purchase agreement was in the best interests of the beneficiaries. He said: “We believed that was the case when we approved sale and purchase agreements, yes…that was often after seeking information or additional information…if the initial information wasn’t clear to us…it didn't happen very often but on occasion we certainly did request more detail…Well, the Murphy settlements by and large….involved cashed-up entities and it was about, to a large extent, releasing the cash. So we…were comfortable that the information we were given was appropriate and certainly was in the interests of the beneficiaries, yes…I mean clearly to release cash for their benefit, and in…the Murphy examples…some sort of a sale agreement was put in front of us which created the situation where it released funds…for the beneficiaries. And it seemed to us, in the absence of any other advice or any other deal, it seemed appropriate to be - and it was acting in their best interests, yes…We didn’t seek - I’m very much going on memory here. I think by and large we were satisfied with the majority of them because they involved cashed-up assets. And there wasn’t a lot more information that could be given.” (8) Mr Richards confirmed that (a) he did not seek any advice from anybody other than Mr Paul, his “go-to person”, and (b) he did not seek the views of either the settlors or the beneficiaries as to what was in their interests: “we relied on information that we had in front of us”

“at all times we did ask was there….any other deal available. Was – the information put in front of us, was that the only deal?...with the Murphy example we were dealing with…largely cashed-up assets…which is rather different from selling a business.”

“No, you have to sell to No Boundary Limited” and he did not try to find another company that might be willing to buy the relevant assets of the trust. He added that it would be very difficult to do that from NZ. (9) Mr Richards said that he knew that there were fees and charges and that allowance was made using the 6% formula. He did not consider whether there may be another buyer willing to pay a smaller discount than 6%. (10) The Murphy Trusts were some of the last that he was involved in and he acted for about 20/25 trusts which involved Mr Paul and/or Lansburys. By the time he was involved in the Murphy Trusts, he knew that the planning involved a sale of the trusts’ assets and him retiring soon after the sale. In his statement he said the NZ Trustees retired when they did in order to facilitate the tax planning; it was in the interests of the beneficiaries not to incur CGT on the disposals. They had already undertaken this type of planning and knew very well they needed to retire before the end of the relevant tax year. It was put to him that Mr Paul and Lansburys knew that they could trust him to retire within the same tax year as the sale took place as part of the planning. He said that he believed he got most of the information upfront, but he cannot confirm that he got the retirement instructions at the beginning. When pressed he said that he was unsure. “It's too long ago. It really is. I’m unsure.” (11) He did not recall that Mr Blower of Lansburys drafted some of the documents such as the deeds. He said that (a) his memory of these individual trusts is pretty faint, certainly the names are very familiar, but the detail, he really would struggle to remember, as it is over 20 years ago, (b) without the documents he would probably have little recollection, and (c) he could not recall where the price paid for the companies came from. He said “I can’t recall the detail and again I’m now influenced by more recent information which has been put in front of me. But I mean from a common sense point of view if they were largely cashed-up…there wouldn’t be a lot of debate about how the price was…calculated”. (12) The information about the cash value of the companies was provided to him by Mr Paul. He definitely had files for the Harris Trust, the name is very familiar and he had a slight recollection that it was a bit different from the Murphy Trusts, but beyond that his recollection is very hazy. He could not comment on the interactions or involvement he had in the sale in which the Harris settlement was involved. Conclusions on the evidence 150. As regards the Murphys and the Murphy Trusts, the evidence establishes that: (1) The RTW planning was implemented as set out in Part A. (2) There was an overall single plan for the sale of the shares held by the Murphy Trusts in a tax efficient manner which was devised, decided upon, facilitated and orchestrated in the UK by the settlors and their UK advisors, Lansburys, acting through Mr Paul, as regards direct interaction with the NZ Trustees. (3) It was integral to the plan that the NZ Trustees would be in place as trustees of the Trusts for a brief period only for the purpose of implementing the plan as was in fact the case. The only reason for their appointment was so that they could play their essential role in implementing the plan. (4) At or around the time the NZ trustees were appointed, (a) the settlors had decided (i) to implement the plan for the tax efficient sale of the shares, as devised by Lansburys, and (ii) as part of that they had decided that the relevant shares were to be sold by the NZ Trustees, and (b) Lansburys, acting on instructions from the appellants, had lined up the NZ Trustees, the purchaser of the assets, No Boundary, and the UK Trustees that would subsequently be appointed. They were all lined up and knew the parts they would have to play. All that was required, once the planning was implemented, was that the parties executed the documents they were provided with in the correct order and that the planning was completed before the end of the 2001/02 tax year. (5) Given the nature of the planning and in light of the witnesses evidence we consider it reasonable to conclude that: (a) Neither Lansburys nor Mr Paul were concerned with whether Mr Richards and/or his wife had the skills and experience necessary to provide trustee services of the type which may be required to act as trustee on an on-going basis for multiple settlements holding valuable assets. That was because the role of the NZ Trustees was to sell the relevant assets and retire straight afterwards. (b) Lansburys’ and Mr Paul’s main concern was to engage reliable professional persons who could be relied on to understand what was expected of them under the pre-agreed plan and to implement it accordingly. (c) The NZ Trustees were appointed as trustees of the Trusts and agreed to act as such on the basis of a common intention and understanding between them and Mr Paul, acting in effect on behalf of Lansburys, that they would in fact implement the plan by taking all the actions considered to be necessary for it to succeed, namely, the sale of the shares and their subsequent retirement in favour of UK trustees, subject to an exceptional unexpected occurrence beyond the parties control, as Mr Paul put it, “force majeure”

“(1) It is necessary to look first for a clear meaning of the words used in the relevant article of the convention, bearing in mind that 'consideration of the purpose of an enactment is always a legitimate part of the process of interpretation': per Lord Wilberforce (at 272) and Lord Scarman (at 294). A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. If the provisions of a particular article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279) (2) The process of interpretation should take account of the fact that - 'The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1987] AC 141 at 152, “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation”: per Lord Diplock (at 281–282) and Lord Scarman (at 293).". (3) Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that “a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”

“1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 3. There shall be taken into account together with the context: any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended.”

“the aim of interpretation of a treaty is therefore to establish, by objective and rational means, the common intention which can be ascribed to the parties. That intention is ascertained by considering the ordinary meaning of the terms of the treaty in their context and in the light of the treaty’s object and purpose. Subsequent agreement as to the interpretation of the treaty, and subsequent practice which establishes agreement between the parties, are also to be taken into account, together with any relevant rules of international law which apply in the relations between the parties. Recourse may also be had to a broader range of references in order to confirm the meaning arrived at on that approach, or if that approach leaves the meaning ambiguous or obscure, or leads to a result which is manifestly absurd or unreasonable.” 155. Mr Windle also referred to Lord Reed’s comments at [58]: “The contemporary background of a treaty, including the legal position preceding its conclusion, can legitimately be taken into account as part of the context relevant to the interpretation of its terms ...”

“Article 31(1) of the Vienna Convention requires a treaty to be interpreted ‘in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. It is accordingly the ordinary (contextual) meaning which is relevant. As Robert Walker J observed at first instance in Memec [1996] STC 1336 at 1349, 71 TC 77 at 93, a treaty should be construed in a manner which is ‘international, not exclusively English’. That approach reflects the fact that a treaty is a text agreed upon by negotiation between the contracting governments. The terms of the 1975 Convention reflect the intentions of the US as much as those of the UK. They are intended to impose reciprocal obligations, as the background to the UK/US agreements from 1945 onwards makes clear...” (Emphasis added.)

“The UT took the view that the practice of the Inland Revenue in relation to the assessment of the profits attributable to the UK branch of a bank was inadmissible as an aid to the construction of Article 8(2) of the 1976 Convention. At [29]-[31] they said: “29. There is also a further – and in our judgment altogether more fundamental reason, which we put to the parties in argument - why this material is inadmissible. That is because this material is irrelevant to the question of construction that we have to answer. The unilateral practice of a taxing authority - no matter how well-advised -is not material that can support or contradict a particular interpretation of a treaty. “29. There is also a further – and in our judgment altogether more fundamental reason, which we put to the parties in argument - why this material is inadmissible. That is because this material is irrelevant to the question of construction that we have to answer. The unilateral practice of a taxing authority - no matter how well-advised -is not material that can support or contradict a particular interpretation of a treaty. 30. It is permissible to look to the subsequent conduct of the parties to a treaty to see if there is a subsequent agreement or practice that goes to the meaning of the treaty. Such agreement or practice would have to be evidenced, and would have to demonstrate a bilateral agreement or practice involving both parties to the treaty. No such agreement or practice was alleged here; and we consider the point to be a factual one, that could only properly be raised before the FTT. 31. We do not consider that the unilateral practice of a contracting party – even if that practice shows a careful attempt by that party to abide by a treaty – can affect the meaning of that treaty or constitute material going to its construction.”

“It would only be inadmissible if the new material made substantive changes which are inconsistent with the commentaries in existence at the time of the 1976 Convention.” 161. HMRC referred to Lord Briggs’ comments at [19] of Fowler that, at [26] to [29] of Smallwood CA, Patten LJ “provided a useful summary of the correct approach to interpretation, largely based on dicta of Mummery J” in Commerzbank and that the whole passage repays reading and [29] is worth quoting in full. We have already set out [26] above. The other passages are set out in our consideration of the decision in Smallwood CA below. 162. HMRC referred also to the comments of Arden LJ in Bayfine v HMRC [2011] EWCA Civ 304, [2012] 1 WLR 1630 at [17] where she said: “…the primary purposes of the Treaty are, on the one hand, to eliminate double taxation and, on the other hand, to prevent the avoidance of taxation. In seeking a purposive interpretation, both these principles have to be borne in mind. Moreover, the latter principle, in my judgment, means that the Treaty should be interpreted to avoid the grant of double relief as well as to confer relief against double taxation.” 163. Mr Windle noted that the prevention of the avoidance of taxation or fiscal evasion of concern in that case related to a situation where parties sought to claim relief in both States but there is no suggestion of double treaty relief in this case. He submitted that there is no support in this case for the proposition that a treaty of general application should be interpreted to prevent relief in circumstances where relief is only claimed once and HMRC’s objection is simply that the Contracting State with the right to tax (NZ) has chosen not to exercise it. 164. Since the hearing the Court of Appeal has again set out how to approach the interpretation of double tax agreements in Haworth CA. Newey LJ gave the leading judgment with which the rest of the panel agreed. He set out a review of the authorities, including at [38], the comments of Lord Diplock in Fothergill v Monarch [1981] AC 251, at 281-282 which are cited in Commerzbank (see (2) in the citation from Commerzbank at [152] above). 165. At [39] Newey LJ said this as regards the practice of a Contracting State: “While subsequent state practice can be an aid to the interpretation of a treaty, in accordance with Article 31(3)(b) of the Vienna Convention, “since there is more than one party to a treaty, what is required is evidence of practice on the part of both parties to that treaty” and “the unilateral practice of one party cannot alter the meaning of a treaty”: see Irish Bank Resolution Corporation Ltd v Revenue and Customs Commissioners [2020] EWCA Civ 1128, [2020] STC 1946, at paragraph 59, per Singh LJ, and also GE Financial Investments v Revenue and Customs Commissioners [2024] EWCA Civ 797, [2024] STC 1310 ("GE Financial Investments"), at paragraph 38, per Falk LJ.” 166. At [40] he noted that where a treaty is based on the Model, the OECD Commentaries on that treaty can also be of assistance by reference to Fowler at [16] and set out Lord Briggs’ comments at [18] of that case and commented as follows: ““The OECD Commentaries are updated from time to time, so that they may (and do in the present case) post-date a particular double taxation treaty. Nonetheless they are to be given such persuasive force as aids to interpretation as the cogency of their reasoning deserves: see Revenue and Customs Comrs v Smallwood [2010] STC 2045, para 26(5), per Patten LJ.”

“Although under UK domestic law there is a difference between residence and chargeability to tax in that residence for only part of the year can result in chargeability for the whole year, this distinction is too subtle to be applied to the provisions of Article 4(1) and would also require one to examine the domestic basis of taxation which the Model Convention on which the Treaty is based is not concerned with. Article 4(1) equates or elides the two by defining residence for Treaty purposes as liability to taxation on the basis of residence. One is therefore resident in a Contracting State within the meaning of Article 4(1) during a particular fiscal year if under TCGA one is chargeable to tax there in that year of assessment. Article 13 is intended to deal with any conflicts which may exist between taxation of capital gains on the basis of the source or situs of the income or gain and taxation on the basis of the residence of the taxpayer. It is therefore limited to defining the relevant basis of taxation for each type of gain and is not concerned to determine the purely domestic question of where the taxpayer is resident for purposes of the treaty or when. Articles 13(1)-(3) therefore provide for gains from the disposal of immoveable property and certain types of business assets to be taxed in the Contracting State in which they are situate and for all other gains to be taxed “only in the Contracting States of which the alienator is resident”: see Article 13(4). Any issue as to which Contracting State that is falls to be determined by reference to Article 4.” (Emphasis added.)

“Article 13 in general deals with a conflict between taxation on the basis of source and on the basis of residence. It states that if the alienator is Treaty Resident in one state, the gains are taxable only in that state. Any dual residence, which we have equated with chargeability, should have been solved by the tie-breaker determining the Treaty Residence before one arrives at Article 13." (4) The Special Commissioners therefore went on to consider the issue of POEM under article 4(3) and (a) they interpreted this as requiring them to decide in which State “the real top level management (or the realistic, positive management) of the trustee qua trustee is found” (see [17]), and (b) applying this test they found that, although trustee meetings took place in Mauritius where the trust was registered, the top level management of the trust was conducted in the UK (see [18]). (5) He explained, at [19], that on appeal to the High Court the taxpayer submitted (and Mann J accepted) that the tie-breaker in article 4(3) has no application because the trustees were never resident in more than one of the Contracting States at the same time. “This argument involves reading “resident” as defined in Article 4(1) as meaning no more than resident or ordinarily resident in the sense contemplated by s 2. Article 13(4) allocates the right to tax the gain by reference to the State in which the alienator is Article 4 resident at the time of the disposal. This was therefore Mauritius. It is impermissible to determine tax residence (as the Special Commissioners did) by using the benefit of hindsight as at the end of the tax year in order to see whether the UK has asserted tax residence on the basis of events subsequent to the disposal. The question of residence has to be decided by asking where the taxpayer was actually resident at the date of the sale. As a consequence, there was no need to resort to the tie-breaker in Article 4(3) which is concerned with concurrent tax residence at the same point in time. It is therefore critical to this argument that, in the case of capital gains, the choice between rival claims by the Contracting States to tax on the basis of residence was intended to be resolved not by Article 4 but by Article 13 itself except in cases where the periods of residence forming the basis of taxation were actually concurrent and that questions of timing are for Article 13 exclusively. One can see this, he said, in Article 13(3) where the POEM of the relevant enterprise is used to allocate the rights to tax between the Contracting States. The POEM of a company, like that of a trust, can change during the course of a particular year of assessment and this points to Article 13(2)-(4) needing to be read so as to determine the position in respect of liability as at the date of the disposal.” (6) At [23] to [25], he set out HMRC’s contentions: “…the purpose of the DTA was to grant relief against double taxation. It was specifically not its purpose to facilitate the avoidance of tax in both jurisdictions. It therefore requires to be construed purposively with that primary object in mind. The result contended for by the trustees (and confirmed by the judge) is inconsistent with this. ….the purpose of Article 13 is to resolve any conflicts which may exist between the taxation of gains on the basis of the situs of the assets and taxation of such gains on the basis of residence or some similar qualification on the part of the alienator. Subject to the exceptions contained in Articles 13(1)-(3) (two of which are merely permissive), it therefore preserves residence as the basis of the right of each Contracting State to tax the gain. What, however, it is not intended to do is to determine what constitutes residence for this purpose or to resolve any issues of potential double taxation which may arise from the adoption of that criterion. Conflicting claims to tax based on residence are matters to be dealt with under the Articles which eliminate double taxation: i.e. Article 24. [HMRC’s] criticism of the judge’s acceptance of the taxpayers’ argument that one has to import into Article 13(4) the date of disposal as a way of resolving potential conflicts between resident based charges to tax is that the time of residence is irrelevant to what Article 13 is intended to achieve and ignores the existence of the other provisions in the DTA which are designed to deal with those problems. If both Contracting States seek to tax the gain because the taxpayer is resident in both countries, but in consecutive periods of time, then Article 13(4) is satisfied. The consequence is that each Contracting State is entitled (in conformity with Article 13(4)) to tax the gain on the basis of residence in accordance with their own domestic legislation and the possibility of double taxation is catered for under Article 24. In the present case that problem does not arise because Mauritius has no capital gains tax regime. He therefore sided with Mr Prosser in front of Mann J in construing "resident" in Article 4(1) as meaning no more than resident in the sense used in the UK tax legislation. On this analysis, Article 4(3) does not come into play because there is not concurrent Article 4 residence in point of time and the issue of the trustees' POEM during the period up to the disposal does not arise. The essential and only real difference between him and Mr Prosser was as to whether Article 13(4) requires the test of residence to be applied at the date of the gain. However, on this appeal, he does accept as an alternative that the construction of Article 4(1) put forward by the Special Commissioners is possible with the result that concurrent residence in the sense of concurrent chargeability existed at the time of the disposal. This therefore brings into operation the tie-breaker under Article 4(3) and Mr Brennan supports the reasons given by the Special Commissioners for deciding that the trustees' POEM was the UK.” 169. Patten LJ then set out his analysis and conclusions as follows: (1) At [28] he said it is important to identify what articles 4 and 13 are designed to achieve in the context of the treaty because “this largely colours the interpretation of the provisions themselves”

“the DTA is not concerned to alter the basis of taxation adopted in each of the Contracting States as such or to dictate to each Contracting State how it should tax particular forms of receipts. Its purpose is to set out rules for resolving issues of double taxation which arise from the tax treatment adopted by each country’s domestic legislation by reference to a series of tests agreed by the Contracting States under the DTA. The criteria adopted in these tests are not necessarily related to the test of liability under the relevant national laws and are certainly not intended to resolve these domestic issues.”

“This, as Mr Brennan has submitted, includes a general rule that capital gains from the alienation of property are to be taxable only in the Contracting State of which the alienator is a resident and four exceptions to that general rule. The first two (which are simply permissive) enable gains from the disposal of immoveable property to be taxed in the State where the property is situated and for gains from moveable business property (forming part of a permanent establishment) of an enterprise based in one Contracting State to be taxed in the other State in which the permanent establishment is situated. The third exception (in Article 13(3)) requires sales of aircraft and ships to be taxable in the Contracting State where the operators have their POEM. The appellants submitted that on HMRC’s interpretation of article 14 articles 14(2) and (3) would be otiose. However, we consider that the same description of their function applies as that given by Patten LJ here. (4) He referred again, at [31], to the definition of residence in article 4(1) and noted it is expressly subject to the provisions of article 4(2) and (3) so that “resident” means someone who is so resident after those tie-breaking provisions have been operated when applicable. This is the definition which is imported into article 13(4). There is no dispute in these cases that the definition of resident of a Contracting State in article 4 of the treaty is imported into article 14 of the treaty. (5) He noted, at [32], there is no express reference in article 13(4) to the alienator’s residence in the Contracting State being limited to the time of the disposal and so the issue is whether it is necessary to construe the words in that way in order to give effect to the purpose of article 13 and the Mauritius treaty more generally. The judge took the view that article 13(4), like the other provisions in the Mauritius treaty which allocate the right to tax particular types of receipt by reference to the situs of the property, the source of the receipt, the POEM of the trader or the residence of the recipient of the income or gain, was intended to identify which Contracting State was entitled to tax the gain rather than merely to choose a basis of taxation. (6) At [33] he continued that: “This analysis supports the submissions of the taxpayer that Article 13(4) is doing the same thing. It is pointing to a single jurisdiction in which tax can be charged, and that is the state of residence. In order to make that workable one has to find a date at which residence has to be judged. There is no other realistic candidate for that point of time other than the date the gain arose (or the date of the disposition, which in this case is probably the same point of time). If there is competition between both states in relation to that point of time, then the tie-breaker applies to produce a single state in respect of which residence (in the status sense used in Article 4) exists.” (7) At [34] he said that on this basis Mann J concluded that the trustees were resident in Mauritius at the time of the disposal and that there was no concurrent UK tax residence at the time which required the application of article 4(3). He adopted the reasoning put forward by both counsel that there were in the tax year 2000/01 consecutive periods of tax residence by the trustees first in Jersey and Mauritius and then in the UK and that the construction of article 4(1) by the Special Commissioners based on chargeability had, as he put it, no statutory justification because, under the TCGA, the trustees were only tax resident in the UK from March 2001 even though this was sufficient under s 2 to render them chargeable for the earlier gains. (8) He commented, (a) at [35], that it is, of course, right that the method of avoiding double taxation which is in operation in provisions such as article 13 does in many cases lead to the identification of one of the Contracting States as being the only country eligible to tax the income or gain in question, and (b) at [36] article 13 provides in terms that gains from the alienation of property “other than that mentioned in paragraphs (1), (2) and (3) … should be taxable only in the Contracting State of which the alienator is a resident”: “Its focus is therefore on specifying the basis of taxation of gains for this residual category of property and nothing else. It is not therefore concerned with how each of the Contracting States chooses to tax gains on the basis of residence. The issue of whether the taxpayer should be resident in the State at the time of disposal or at some other point in time are matters for the State in question to decide as part of its own taxation regime.” (Emphasis added.)

“the DTA must be assumed to have been drafted in a way which comprehends any tax treatment of capital gains based on residence or similar criteria. That is what the definition of "resident" in Article 4(1) says and any narrower construction of it would defeat the obvious purpose of the Model Convention. The DTA therefore covers legislation such as s.2 TCGA under which a gain is made taxable in the UK by virtue of residence in a period after the gain has occurred. Neither side on this appeal contends otherwise. The question which this therefore raises (and critically in the present case) is how the DTA is intended to resolve residence/residence based conflicts when the liability under the relevant domestic legislation does not depend upon concurrent periods of residence.” (Emphasis added.)

“it must follow that the tie-breaker in Article 4(3) only applies to concurrent physical residence at the date of disposal and no Contracting State that is party to a DTA in the form of the Model Convention can tax capital gains under Article 13(4) other than by reference to residence at the time. Provisions such as s.2 TCGA can never trump taxation based on residence at the time of the gain.” (11) At [39] he noted that (a) the High Court accepted the argument that it is necessary to import into article 13(4) a reference to the date of disposal because otherwise the provision is unworkable, (b) but “the snapshot argument is not sufficient in itself to avoid a charge to capital gains tax under the scheme. It also depends (as the judge accepted) on construing “resident” in Article 13(4) as meaning no more than resident for tax purposes in the s.2 sense at that time rather than chargeable to tax in respect of the gain by virtue of a later period of UK tax residence”. (12) At [40] to [43] he disagreed with the decision of the High Court and set out his conclusions: “40. For the reasons I have explained, Article 13(4) must, I think, be construed as effective to deal with any liability to taxation for capital gains which either Contracting State may impose regardless of the basis of that charge under the domestic legislation in question. It seems to me unlikely that the draftsman of the Model Convention intended that capital gains which are to be taxable only on the basis of residence should depend exclusively on residence at the date of disposal and so exclude the rights of a Contracting State to tax gains by reference to residence within the same tax year. The definition of “resident of a Contracting State” in Article 4(1) re-inforces this view by making “liability to taxation” by reason of residence the criterion for the taxation of capital gains under Article 13(4). This, I think, must denote what the Special Commissioners described as chargeability and not simply physical residence. That view is, I think, consistent with the purpose of Article 13(4) and avoids descending into whether the UK or Mauritian requirements for residence are satisfied. The definition assumes that they are and allocates the right to tax on the basis that there is liability. 41. For essentially the same reason, I also reject the submission that Article 13(5) confirms that Article 13(4) is concerned with tax residence at the date of disposal and not with chargeability to tax in respect of the gain. The terms of Article 13(5) are not sufficient in my view to contradict the clear scheme of Articles 13(1)-(4) as read in the light of Article 4(1). All that Article 13(5) does is to provide confirmation that residence in previous fiscal years is not excluded as a basis of taxation by Article 13(4). It does not prevent Article 13(4) from applying to attribute the right to tax the gain to whichever of the Contracting States imposes a liability to taxation on the alienator based on domicile, residence or similar criteria in its relevant fiscal year. 42. The emphasis on liability to taxation also disposes of an essential plank in the taxpayers' argument which is that one considers the question of liability as at the date of the disposal and not with the benefit of hindsight. I can see no justification for this in the terms of the DTA. If the provisions of Article 4 (and therefore Article 13(4)) are to cover every form of capital gains tax based on residence then the issue of liability has to be looked at retrospectively having regard to which of the Contracting States seek to make the taxpayer liable for the gain. It seems to me both artificial and self-defeating to ask that question at the date of disposal without regard to the full tax consequences which flow from the gain. That would lead (as it has in this case) to a situation in which the DTA fails to regulate all the tax consequences of the disposal and leads to tax relief being granted even when no double taxation in fact exists. 43. I therefore accept…that the provisions of Article 13(4) are not to be read as incorporating a reference to the date of disposal but (for the reasons already given) I am not persuaded by his submission that one can construe Article 4(1) as meaning no more than tax resident and so avoid any application of the tie-breaker provisions in Article 4(3). The definition of "resident" in Article 4(1) is critical to the meaning of Article 13(4) and Article 4, once applied by the wording of Article 13(4), has to operate in its entirety. The definition of "resident" in Article 4(1) is expressly subject to Article 4(3) which therefore applies whenever the alienator is liable to taxation in both Contracting States in respect of the gain. Article 4(3), as I have explained, is focused on liability for tax regardless of the period of residence under national law which creates that liability. Looked at in this way it becomes meaningless and impermissible to draw a distinction between consecutive and concurrent periods of "residence". The DTA is concerned only with the possibility of a double tax charge on the same gain and not with the period of residence which gives rise to it. If that situation occurs then Article 4(3) operates to resolve the matter as part of Article 13(4) which incorporates it.” (Emphasis added.)

“…I reject the trustees’ argument that Article 13(4) requires one to look no further than where the trustees were tax resident at the date of the disposal without regard to subsequent events. I also prefer the view of the Special Commissioners that "resident of a Contracting State" under Article 4(1) means chargeable to tax in that State on account of residence and that, for this purpose, one has to take into account the tax treatment of the gain under the domestic legislation of both Contracting States regardless of the period of residence which gives rise to the liability. It follows that I also reject Mr Brennan's argument that there is no need to apply Article 4(3) because the period of residence which gives rise to the UK tax charge in this case under s.2 was consecutive upon the earlier period of Mauritian tax residence up to and including the date of the disposal. It follows from my construction of Article 4(1) that Article 4(3) applies in every case in which there is a “liability to taxation” in both Contracting States.” 170. In effect Patten LJ’s view was that article 13(4), in combination with article 4, operates to allocate taxing rights to a single State where the taxpayer would otherwise be within the scope of a charge to tax on a disposal of “residual property” due to being “liable to tax” in both States by reason of residence for domestic tax law purposes, regardless of the precise stipulations under domestic law as to when the person must be resident in order to be so liable. Hence, in his view, it is not relevant that under the UK rules a person is liable to CGT on a gain arising on residual property due to residence in a period which does not coincide with the date of the disposal or with the period when the trustees were resident in Mauritius for Mauritius tax law purposes. 171. Mr Windle made the following main submissions in support of the appellants’ stance on how article 14(4) and 4(1) operate in the treaty: (1) In August 1983, when the treaty was agreed, both the UK and NZ were members of the OECD and must have been aware of the 1977 Model then in place. At that time, both countries had double tax agreements with other countries that used a definition of residence that was much closer to that Model such as the 1981 Mauritius treaty considered in Smallwood and the 1979 NZ/France agreement. Negotiators would have known that whether a person was liable to CGT in the UK did not perfectly coincide with their residence in the UK for UK tax purposes (under s 2 Capital Gains Tax Act 1979, the predecessor to s 2 TCGA). This is important context and, as a result, in the absence of clear contemporaneous evidence suggesting otherwise, the different definition of residence in the treaty must be understood as a choice taken by the parties to the treaty and construed accordingly. Applying this construction, until the UK trustees were appointed, the Trusts were not resident in the UK for the purposes of the treaty. (2) This different definition of residence also carries through into the interpretation of article 14(4). Para (4) provides the general rule that gains from the alienation of property are taxable in the Contracting State of which the alienator is resident. Paras (1) and (2) are permissive exceptions that allow the Contracting State in which the alienator is not resident also to tax the alienation of specified types of property. Para (3) provides an exception to para (2) for the alienation of specified types of property. It therefore follows that gains from the alienation of any property other than that referred to in paras (1), (2) and (3), are taxable only in the Contracting State of which the alienator is a resident. This follows from the fact that article 4 is concerned with identifying a single place of residence at each moment in time and that any alternative interpretation would render paras (1) and (2) otiose. Further, it follows from the fact that the treaty is concerned with factual residence and not liability to tax, that the right to taxation in article 14(4) is allocated to the Contracting State in which the alienator is resident. (3) This is supported by the following example given in the 2000 OECD Commentary: “... in one calendar year an individual is resident of State A under that State’s tax laws from 1 January to 31 March, then moves to State B. Because the individual resides in State B for more than 183 days, the individual is treated by the tax laws of State B as a State B resident for the entire year. Applying special rules [the tie breaker] to the period 1 January to 31 March, the individual was a resident of State A. Therefore, both State A and State B should treat the individual as a State A resident for that period, and as a State B resident from 1 April to 31 December.” (4) The different result in Smallwood CA came about because of the different wording in the Mauritius treaty. To apply the same analysis here would require a link between residence under article 4(1) with “liability to tax” or that residence is determined over a period. There is no basis for reading those words into the treaty. HMRC’s approach raises the difficulty that tax years in the two States may not coincide. The UK tax year was relevant in Smallwood because in that case residence was tied to liability to taxation and liability to CGT is tied to a person being resident in the UK for part of a tax year. HMRC’s approach causes difficulties in a number of scenarios. For example, if a company was resident in NZ for NZ tax purposes until midway through the UK tax year and then only resident in the UK for UK tax purposes for the rest of the year, on HMRC’s analysis the tie breaker would apply and it would be necessary to consider how to apply the POEM test – whether over the whole tax year or by reference to the length of time in each place or where the most important decisions were taken. Assessing POEM over a period where there is no concurrent domestic residence becomes unmanageable. (5) The words of article 4(1) are clear in themselves but they are supported by the context and purpose as divined from the rest of the treaty. Article 4 is a foundational provision. It is applied in every subsequent provision of the convention except articles 25 (exchange of information), 27 (entering into force), and 28 (termination). There are two instances which require the consideration of the situation over a period (articles 15 and 16) which show that where there is a requirement to assess something over a period, that process and period is identified in terms and in neither case is the period tied to the UK tax year. (6) The case law makes clear that it is instructive in construing a double tax agreement to look back at the previous agreements between the same States. In the original double tax agreement between the UK and NZ it is clear that the test for residence would not have worked if it was applied to a period of time in which there was consecutive residence, because to be resident in NZ a person had to be resident in NZ for the purpose of NZ tax and not resident in the UK for the purposes of UK tax. The 1966 convention and the applicable one do not suggest any major change was intended and certainly not that residence was to depend on liability to tax or that an approach is required looking at a period of time. (7) As the UK and NZ chose not to follow the Model on article 4(1); the commentary in it should be approached with caution in this context. The 1977 OECD Commentary (a) draws a distinction between taxation on the basis of a connection between the person and the state, such as residence, and taxation on the basis of a connection between the income and/or gains and the State, on the basis of source or situs. Where there is an appropriate connection between the person and the State, generally the State imposes a comprehensive liability to tax on all income and gains, (b) states that double tax agreements do not normally concern themselves with the State’s domestic laws on when a person is subject to comprehensive liability to tax, (c) sets out that when both States claim the right to tax, a choice needs to be made between them, including when both States claim a right to tax on the basis of “residence” (see paras 1 to 7), (d) explains that the definition aims at covering the various forms of personal attachment to a State which, in the domestic taxation laws, form the basis for comprehensive taxation. The Commentary does not state the same thing about companies and it is notable that States are free to expand or reduce the list of criteria set out in article 4(1) in the Model. In the commentary by Robert Couzin which HMRC refer to (see below) he states it is not uncommon for States to add to the list and, whilst it is rarer for States to remove things from the list, it is done. He notes that where the wording used in this treaty is used, all persons who meet the domestic residence test are article 4(1) resident. Equally it must follow that all persons who do not meet the domestic residence test are not article 4(1) resident. So article 4(1) in a tax treaty defines the class of persons that each State claims a default right to subject to comprehensive liability to taxation, as against the other party to the agreement, subject to the tie-breaker. States who enter into double taxation agreements can and often do vary the scope of the class of persons. Where a person is liable to tax under domestic laws of a State but does not fall within the class stated in the agreement, the State has agreed that it does not have the default right to subject such a person to comprehensive liability to taxation; it has made a choice to that effect. (8) NZ is a former British colony with a common law system. At the time of all three agreements the UK had common law test for both individual and corporate residence and when the treaty was agreed, the common law test for corporate residence in NZ was materially identical to that in the UK. Where both States apply the same test for residence, it is a perfectly sensible choice to allocate the right to tax to the State in which the person is resident. Such a shared common law heritage is the most likely explanation for the other four States HMRC have identified who use similar or the same wording to that in article 4 of the treaty in their agreements with the UK (the US, Israel, Jamaica and Australia). This interpretation does not give a result that is in any way radical and there is no justification for reading the words “liable to tax by reason of” into article 4(1) of the treaty. The UK chose to render persons liable for CGT on gains arising in a tax year when they were not resident, based on their past or future residency in that tax year. The legislation could easily have said if a person is resident in part of the tax year the person is resident in the whole year but it does not. In Smallwood SpC the Commissioners record that by concession chargeability to CGT was often limited to the period of residence, while noting that no concession applied in the case of trustees (see [79] of Smallwood SpC). So the fact that this was the sort of concession that the UK might be willing to make does not seem so surprising. (9) Smallwood CA is of limited assistance to determining the correct interpretation of the relevant articles given that the treaty under consideration contained different wording. Patten LJ’s comments, in particular, those in [36] and [37], show that Patten LJ’s analysis was reliant on the particular terms of article 4(1) which reflected the same terms in the Model. The UK and NZ did not make the same choice in the wording they include in article 4(1). They chose to give the default or in principle right to impose liability to tax to the Contracting State in which the person is resident for domestic law purposes and, as such, it is necessarily concerned with how the Contracting States chose to tax on the basis of residence. The reasoning in [37] is a product of the different choices the Contracting States have made in article 4(1) in the Mauritius treaty. This is also evident in [41] to [43] where Patten LJ again referred back to article 4(1). 172. HMRC submitted that the treaty must be purposively construed to achieve its dual purposes as set out by Patten LJ and in the OECD Commentary (see the Commentary on the Model of 2008 at paras 7 to 10 and on the Model of 1977 at paras 7 to 9). Despite some differences from the Model, the treaty operates in the same way as Patten LJ set out and his observations about the purpose of the Mauritius treaty and what articles 4 and 13 are designed to achieve apply equally to the provisions in the treaty. In support of this HMRC made the following main points: (1) HMRC’s analysis is supported by the relevant OECD Commentary. Article 14(4) of the treaty mirrors article 13(4) of the Model. Accordingly, the OECD Commentary on article 13 and 4 is an admissible aid to the construction of article 14. The Model allows for States to tax the alienation of goods in whatever ways they see fit, and its intention is to provide a framework for all systems of taxation. The 2000 Commentary on article 4 (the 1977 Commentary is in much the same terms): (a) states that article 4 is intended to solve issues of dual residence under the domestic laws of the Contracting States, (b) recognises that, under domestic law of a State, a person may be liable to tax for a full year even if he is only resident in that State for part of the year, (c) makes the point made by Patten LJ that the purpose of the double taxation convention is not to interfere with the domestic rules on residence or lay down any standards for full liability to tax, and (d) sets out the concept of residence and the different criteria that are applied because there are different connecting factors that might make a person liable to tax. In the treaty this extended definition is simply replaced with the compendious line: resident for tax purposes which in effect wraps up all of those different concepts into one more simple test. The 2000 commentary on article 13 states that, “[a] comparison of the tax laws of the OECD Member countries shows that the taxation of capital gains varies considerably from country to country” (para 1), sets out a number of specific issues raised by different systems of taxation and then states: “3. The Article does not deal with the above-mentioned questions. It is left to the domestic law of each Contracting State to decide whether capital gains should be taxed and, if they are taxable, how they are to be taxed…It is understood that the Article must apply to all kinds of taxes levied by a Contracting State on capital gains.” (2) It is clear from this that, as recognised by Patten LJ in Smallwood, the relevant articles are not intended to interfere with UK domestic taxation. They are intended to solve issues of actual double taxation and prevent fiscal evasion. There is no relevant distinction between being resident in a State for the purposes of that State’s tax and being liable to taxation in a State by reason of residence (and similar connecting factors). The test in the treaty is merely a simplification of the wording in the Model. That article 4(1) of the treaty states resident in the UK for the purposes of UK tax brings in the UK’s domestic approach to taxation and chargeability. The fact that the UK chooses to tax a person on gains made during another part of the tax year, before the person was resident, is a matter of UK domestic law (see s 2 and s 69 TCGA as regards trustees). In effect, the UK CGT rules render a person “resident” in the sense of liable to CGT on disposals made in a tax year if the person is resident only for part of the tax year. That is no reason to construe article 14(4) so as to limit the enquiry into residence to the time of alienation and exclude residence at a later part of the same tax year. It is legitimate to read into the treaty that residence is for a UK tax year because the concern is with residence for the purposes of UK tax and that is simply how the UK rules work. There is no split year treatment in these circumstances under UK law (3) If the appellants’ argument were correct, it would never be possible for the UK to impose a charge to tax under s 2 when a settlement was not resident in the UK at the moment of alienation. That would be a substantial interference with the UK’s freedom to determine how to tax capital gains and inconsistent with the fact that the treaty is not concerned with how each State chooses to tax gains and, in a case such as this, result in fiscal of evasion of the type the treaty is intended to prevent. There is no reason to believe that the negotiators of the treaty intended such a radical result. That is exactly the sort of scenario the Commentary makes clear double tax agreements are designed to prevent as one of their purposes is to prevent fiscal evasion. (4) It is not correct that an interpretation of the treaty that does not look only at residence at a certain point in time would render articles 14(1) and (2) otiose. The Court of Appeal’s construction in of article 13(2), which is identical to article 14(2) did not render it otiose (see [30]). As set out above, we accept that point. (5) Whilst it must be the case that residence (as opposed to liability) is determined by reference to a point in time, there is no reason that the particular point in time should be the moment of alienation. As noted, the wording is a simplification of that in the Model, which is not intended to have a fundamentally different meaning: (a) The phrase used in the Model/Mauritius treaty is relatively obscure and its application may require the interpretation of the phrases “liable to taxation” and “criterion of a similar nature”

“…circumvents the entire discussion of “liable to tax”

“The disadvantage of such a deletion could be some loss of pre-emptive flexibility, to accommodate unanticipated changes in the criteria utilized by one of the states. The advantage is to remove a source of possible ambiguity or uncertainty. Neither the United States nor Canada require the reference to “place of management” in Article IV(1) of their convention and, had it not been there, the Crown Forest problem would probably never have arisen.” (see page146) (6) The most likely explanation for the wording of the treaty is as Couzin states. Similar or the same definitions to that in the treaty appear in the UK/USA double tax agreement of 1980 (at article 4(1)), the UK/Israel double tax agreement of 1963 (at article 2(1)(h)(i)), the UK/Jamaica double tax agreement of 1973 (at article 3(1)), and the UK/Australia double tax agreement of 2003 (at article 4(1)). Although Mr Couzin’s book is some years old, it was referred to and cited by the Court of Appeal in GEFI as one of the academic texts that they relied upon. The use of this definition in the agreements with these countries may relate to the fact the States are broadly common law types of jurisdiction. The fundamental point is that this wording is a simplification of the wording in the Model; it is not a fundamental change of the wording and does not lead one to interpret article 4 and 14 of the treaty any differently to the corresponding articles in the Mauritius treaty/the Model. (7) One can get no assistance in interpreting the treaty from looking at the wording of the previous double tax agreements between the UK and NZ. In particular, the first agreement Mr Windle relied upon predated the Model and the concept of CGT. The wording was quite strange and did not provide for anything like the current circumstances. Mr Windle’s approach of seeking to trace that provision through the later agreements is an impermissible approach on the facts of this case and given the date of the prior agreements as an aid and interpretation of the current treaty. It is not apparent how the example Mr Windle gave relating to an individual assists his case 173. In our view, the analysis set out by Patten LJ in Smallwood CA applies in the same way to the interpretation of the treaty as it does to the application of the Mauritius treaty. We do not regard the difference in wording in article 4(1) of the treaty compared with that in article 4(1) of the Mauritius treaty/the Model as leading to a different result. The appellants’ analysis and reasoning was very focused on article 4(1) and its application in general terms and not on how that provision is to be construed in conjunction with article 14(4), specifically in light of the purpose and object of that article. There is no material difference in the wording of article 14(4) of the treaty and article 13(4) of the Mauritius treaty/wording of the Model. There is no reason to suppose that in using the simplified definition of a “resident of a Contacting State” the States intended that the gains provisions in the treaty would operate in a different way than the relevant OECD Commentary indicates the equivalent provisions in the Model should operate, as explained by Patten LJ in Smallwood CA. 174. As the appellants’ emphasise, Patten LJ’s comments were to some extent tied in to the specific wording of article 4(1) of the Mauritius treaty which differs to that in article 4(1) of the treaty, as that was the wording the Court of Appeal was faced with in that case. However, we cannot see that the use of the simplified wording in article 4(1) of the treaty alters what Patten LJ took to be the plain purpose of the gains provisions (in that case in article 13(4) of the Mauritius treaty), as accords with the OECD Commentary on them. Moreover, as set out above, we do not consider his analysis of that purpose to be dependent on the specific wording of article 4(1) of the Mauritius treaty. 175. We recognise of course that, as Mr Windle emphasised, the UK and NZ made a choice to use the simplified version of the definition of “resident of a Contracting State” in the treaty rather than to use the wording in the Model. It is not readily apparent why that was. The appellants’ suggestion that it may emanate from the common law background of each the UK and NZ be correct. In our view, however, there is nothing to suggest in any of the materials to which the appellants’ referred that this choice was made with a view to article 14, as an article in which the residence test is critical, operating in a way that which would give a result which is clearly contrary to the overall purpose and object of the Model and of the gains provisions specifically, as those objects and purposes are explained in the OECD Commentary. The purpose of article 14(4), reflecting as it does the terms of the Model, is to avoid double taxation in the manner set out by Patten LJ as regards the corresponding provisions in the Mauritius treaty. As in Smallwood, the appellants’ interpretation would lead to the result described by Patten LJ in which the treaty would fail to regulate all the tax consequences of the disposals and would lead to tax relief being granted even when no double taxation in fact exists (as NZ does not tax the gains arising on the disposals, as was similarly the situation in Mauritius as regards the gains arising to the taxpayers in Smallwood). 176. Interpreting the provisions with their purpose in mind we do not regard this interpretation of them as leading to an impermissible reading in of words. We cannot discern any difference in the underlying purpose of article 4 in defining a resident of a “Contracting State” as a person who is resident in that State “for the purposes of tax” as opposed to a person who is “liable to tax….by reason of residence”

“43. The OECD Commentary accompanying the 1977 version of the Model Convention included these comments on Article 4(3): “21. This paragraph concerns companies and other bodies of persons, irrespective of whether they are or not legal persons. It may be rare in practice for a company, etc. to be subject to tax as a resident in more than one State, but it is, of course, possible if, for instance, one State attaches importance to the registration and the other State to the place of effective management. So, in the case of companies, etc., also, special rules as to the preference must be established. “21. This paragraph concerns companies and other bodies of persons, irrespective of whether they are or not legal persons. It may be rare in practice for a company, etc. to be subject to tax as a resident in more than one State, but it is, of course, possible if, for instance, one State attaches importance to the registration and the other State to the place of effective management. So, in the case of companies, etc., also, special rules as to the preference must be established. 22. It would not be an adequate solution to attach importance to a purely formal criterion like registration. Therefore paragraph 3 attaches importance to the place where the company, etc. is actually managed. 23. The formulation of the preference criterion in the case of persons other than individuals was considered in particular in connection with the taxation of income from shipping, inland waterways transport and air transport. A number of conventions for the avoidance of double taxation on such income accord the taxing power to the State in which the “place of management” of the enterprise is situated; other conventions attach importance to its “place of effective management”, others again to the “fiscal domicile of the operator”

“The commentary in Article 4 paragraph 3 of the OECD Model records the UK view that, in agreements (such as those with some Commonwealth countries) which treat a company as resident in a state in which 'its business is managed and controlled', this expression means 'the effective management of the enterprise'. More detailed consideration of the question in the light of the approach of continental legal systems and of community law to the question of company residence has led HMRC to revise this view. It is now considered that effective management may, in some cases, be found at a place different from the place of central management and control. This could happen, for example, where a company is run by executives based abroad, but the final directing power rests with non-executive directors who meet in the UK. In such circumstances the company’s place of effective management might well be abroad but, depending on the precise powers of the non-executive directors, it might be centrally managed and controlled (and therefore resident) in the UK.” 45. When the next version of the Model Convention was published in 1992, Article 4(3) was unchanged except that “the State in which” was substituted for “the Contracting State in which”

“The formulation of the preference criterion in the case of persons other than individuals was considered in particular in connection with the taxation of income from shipping, inland waterways transport and air transport. A number of conventions for the avoidance of double taxation on such income accord the taxing power to the State in which the “place of management” of the enterprise is situated; other conventions attach importance to its “place of effective management”, others again to the “fiscal domicile of the operator”.” 46. In the 2000 version of the Model Convention, Article 4(3) was still in the same terms, save that “only” was inserted between “a resident” and “of the State in which its place of effective management is situated”

“As a result of these considerations, the “place of effective management” has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.” 47. No changes were made to Article 4(3) in the 2008 version of the Model Convention, but part of the third sentence of paragraph 24 of the Commentary was omitted so that paragraph 24 now read: “As a result of these considerations, “the place of effective management” has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.” 179. The appellants submitted that: (1) It is highly relevant that the OECD Commentary on the 1977 Model includes no observations by the UK and the following observation by NZ: “25. New Zealand’s interpretation of the term “effective management” is practical day to day management, irrespective of where the overriding control is exercised.” (2) The Commentary sets out the role of an observation at para 27 as follows: “27. Observations on the Commentaries have sometimes been inserted at the request of some Member countries who were unable to concur in the interpretation given in the Commentary on the Article concerned. These observations thus do not express any disagreement with the text of the Convention, but furnish a useful indication of the way in which those countries will apply the provisions of the Article in question.” (3) Following the agreement of the treaty, the NZ Inland Revenue Department published a “Public Information Bulletin” providing commentary on the terms of the treaty which states of article 4(3): “Paragraph 3 provides that where a company or other legal person is resident in both countries, residence will be where the place of effective management of the enterprise is situated. In this context, New Zealand views the term “effective management” as meaning the practical day to day management, irrespective of where the overriding control is exercised.” (4) For a convention to be effective both signatories have to apply the provisions in the same way. NZ Inland Revenue Department Public Information Bulletins have been used by the NZ courts to assist with ascertaining legislative intention (see for example Marac Life Insurance Ltd v Commissioner of Inland Revenue [1986] 1 NZLR 694, 713 (CA)). On 11 April 1977 the Council of the OECD, which included an ambassador from the UK, recommended that governments: “when concluding new bilateral conventions or revising existing bilateral conventions between them, to conform to the Model Convention set out in the Annex hereto (hereinafter referred to as the “Model Convention”), as interpreted by the Commentaries thereto and having regard to the reservations and derogations to the Model Convention which are contained in the Report referred to above”

“Both the Model Convention and the Treaty proceed on the basis that there will be only one POEM at a point in time. Thus Article 4(3) of the Treaty provides for a person to be deemed to be a resident of “the”

“[t]he relevance of commentaries adopted later than the treaty is more problematic because the parties cannot have intended the new commentary to apply at the time of making the treaty”: see paragraph 99 of their decision. On the basis that ignoring them would mean “shutting one’s eyes to advances in international tax thinking”, the Special Commissioners took the view that “[t]he safer option is to read the later commentary and then decide in the light of its content what weight should be given to it”: see paragraph 99.” 187. He continued that, in any event, at [56], the passage from the Commissioners’ decision he had quoted above did not depend on what was said in the 2000 Commentary: “POEM’s role as a tie-breaker is evident from the terms of the Treaty and the 1977 Model Convention themselves. Not only, therefore, is there no good reason to take other States to have accepted that CMC, as developed in our domestic case law, should govern the interpretation of POEM, but CMC is not designed to serve the same purpose as POEM and may not yield the single answer which POEM needs to supply.” 188. At [57] he said: “The position is instead that it can be seen from the Treaty that there was meant to be just one POEM.” 189. Newey LJ rejected the appellants’ argument that it is relevant that in Wood v Holden, Chadwick LJ said he did not discern a significant difference between CMC and POEM (see [6] and [44]). He said, at [59], these comments are not of assistance; they were obiter, they were to an extent tied to “the circumstances which the commissioners had to consider” and “the circumstances of this case” and, “more importantly, Chadwick LJ did not explain his reasoning”. 190. He set out his view of the POEM test at [60] to [65] as follows: “60. Returning to the language of Article 4(3), that requires the focus to be on the place of “effective management”

“I confess that I am not persuaded that realistically the place of effective management of the settlement was in the Republic of Ireland. I emphasise the adjective “effective”

“The facts surrounding the appointment of PMIL lead us to the view that the real top level management, or the realistic, positive management of the trust, remained in the United Kingdom. We accept that the administration of the trust moved to Mauritius but in our view the “key” decisions were made in the United Kingdom.” 192. He continued that, expanding on this, the Commissioners said this at [143] to [145] of their decision: “143. We fully accept that the decision to sell the shares that day was taken by the directors of PMIL at the telephone meeting on 10 January 2001. We also accept that if, for example, the price of the shares had fallen to a level that meant that no gain would be realised on their disposal, the shares would not have been sold but would have been retained and perhaps sold later. Nevertheless, in our view this was a lower level management decision as there was no doubt that the shares would be sold; the real top level management decisions, or the realistic, positive management decisions of the trust, to dispose of all the shares in a tax efficient way, had already been, and continued to be, taken in the United Kingdom. The “key” decisions were made in the United Kingdom. 144. Finally the events after the sale of the shares confirm our view. The tax planning exercise was completed by the appointment of United Kingdom trustees…. 145. We conclude that the state in which the real top level management, or the realistic, positive management of the trust, or the place where key management and commercial decisions that were necessary for the conduct of the trust’s business were in substance made, and the place where the actions to be taken by the entity as a whole were, in fact, determined between 19 December 2000 and 2 March 2001 was the United Kingdom.” 193. At [71] he set out that Hughes LJ, with whom Ward LJ agreed on this issue (Patten LJ dissented on this point), considered that the Commissioners had been entitled to find that the POEM was in the UK and quoted Hughes LJ’s conclusions on this in full (at [66] to [70] of Smallwood CA). At [72] he said he did not find this (relatively compressed) judgment easy to interpret in every respect but he concluded, at [73], that it is clear that Hughes LJ considered that the POEM should not be determined by reference only to the circumstances at the “moment of disposal” or on Wood v Holden principles: “He evidently took a broader view and considered that the POEM could be found to be in the United Kingdom on the basis that there was “a scheme of management of this trust which went above and beyond the day to day management exercised by the trustees for the time being, and the control of it was located in the United Kingdom”