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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue and Customs v Smallwood & Anor [2010] EWCA Civ 778 (08 July 2010) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2010/778.html Cite as: 12 ITL Rep 1002, 80 TC 536, [2010] EWCA Civ 778, [2010] BTC 637, [2010] STI 2174, [2010] STC 2045, (2010) 154(27) SJLB 30, [2010] WTLR 1771

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION
MR JUSTICE MANN
CH/2008/APP/0260

		Royal Courts of Justice Strand, London, WC2A 2LL
		8th July 2010

Lord Justice Patten :

Introduction

1. This is an appeal by The Commissioners for HM Revenue and Customs ("HMRC") against a decision of Mann J dated 8^th April 2009 ([2009] EWHC 777 (Ch)). He allowed an appeal by Mr and Mrs Smallwood against the decision of the Special Commissioners (Dr A.N. Brice and Dr J.F. Avery-Jones) released on 19^th February 2008 who dismissed the taxpayers' appeals against two closure notices issued by HMRC on 31^st January 2005 which relate to the Respondents' tax returns for the year ending on 5^th April 2001.
2. The first of these notices concerns the tax return made by Mr and Mrs Smallwood in their capacity as trustees of what has been referred to as the Trevor Smallwood Settlement ("the Settlement") dated 24^th February 1989. This is a settlement made by Mr Smallwood for the benefit of himself and members of his family. During the tax year in question the bulk of its assets comprised shares in two quoted companies, FirstGroup plc ("FirstGroup") and Billiton plc ("Billiton"). As of April 2000 the trustee of the Settlement was a Jersey company called Lutea Trustees Limited ("Lutea"). The shares in both companies had increased considerably in value and Mr Smallwood and the trustee were advised to dispose of them and to diversify the trust investments.
3. Liability for capital gains tax depends upon residence in the United Kingdom and applies to chargeable gains accruing to the taxpayer in a year of assessment during any part of which he is so resident: see s.2(1) of the Taxation of Chargeable Gains Act 1992 ("TCGA"). There are, however, special provisions which apply to chargeable gains on disposals by the non-resident trustees of settlements in which the settlor retains an interest and where he is himself UK resident in the relevant year of assessment. These are contained in s.86 TCGA which (so far as material) provides as follows:-

"86. Attribution of gains to settlors with interest in non-resident or dual resident settlements

(1) This section applies where the following conditions are fulfilled as regards a settlement in a particular year of assessment –

(a) the settlement is a qualifying settlement in the year;

(b) the trustees of the settlement fulfil the condition as to residence specified in subsection (2) below;

(c) a person who is a settlor in relation to the settlement ('the settlor') is domiciled in the United Kingdom at some time in the year and is either resident in the United Kingdom during any part of the year or ordinarily resident in the United Kingdom during the year;

(d) at any time during the year the settlor has an interest in the settlement;

(e) by virtue of disposals of any of the settled property originating from the settlor, there is an amount on which the trustees would be chargeable to tax for the year under s.2(2) if the assumption as to residence specified in subsection (3) below were made.

…..

(2) The condition as to residence is that –

(a) the trustees are not resident or ordinarily resident in the United Kingdom during any part of the year….

(3) Where subsection (2)(a) above applies, the assumption as to residence is that the trustees are resident or ordinarily resident in the United Kingdom throughout the year; …..

(4) Where this section applies –

(a) chargeable gains of an amount equal to that referred to in subsection (1)(e) above shall be treated as accruing to the settlor in the year."

4. Mr and Mrs Smallwood have always been domiciled and resident in the UK. If therefore Lutea had remained the trustee throughout the year of assessment and so satisfied the condition as to residence in s.86(2)(a) the provisions of subsection (4)(a) would apply. As a consequence, Mr Smallwood as the settlor would have become liable for capital gains tax on the chargeable gain in accordance with ss.2(4) and (5) TCGA. Although he would be entitled to an indemnity against the trustees for the tax paid under paragraph 6 of Schedule 5 TCGA, the net result would be that capital gains tax would be payable on the gains resulting from the sale of the shares.
5. In an attempt to avoid the effects of s.86 the trustees entered into what is commonly referred to as a "Round the World" tax scheme recommended by KPMG Bristol which is designed to take advantage of the provisions of s.77 TCGA which govern the tax treatment of chargeable gains accruing to UK resident trustees of a settlement in which the settlor retains an interest. So far as material, s.77 provides that:-

"(1) Where in a year of assessment:

(a) chargeable gains accrue to the trustees of a settlement from the disposal of any or all of the settled property,

(b) after making any deduction provided for by s.2(2) in respect of disposals of the settled property, there remains an amount on which the trustees would, disregarding s.3, 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;

the trustees shall not be chargeable to tax in respect of those but instead chargeable gains of an equal amount to that referred to in paragraph (b) shall be treated as accruing to the settlor in that year."

6. The scheme centres on the condition contained in s.77(1)(b) which requires the gains to be chargeable to tax in the trustees' hands under s.2(1) TCGA. What was proposed was the appointment of new non-resident trustees in place of Lutea based in a country which did not itself tax capital gains and which had entered into a double taxation agreement ("DTA") with the UK under which chargeable gains on the shares would be taxable only in the contracting state in which the trustees were then resident. The shares would then be disposed of by the new trustees who would subsequently be replaced by UK resident trustees within the same year of assessment. The appointment of UK resident trustees within the same year of assessment would exclude the operation of s.86 which requires the trustees to remain non-resident throughout the relevant year: see s.86(2). The intended effect of the scheme was that the application of the DTA would prevent the satisfaction of the s.77(1)(b) conditions because the trustees would in that year of assessment not be chargeable to tax in the UK in respect of the gains on the shares. As a consequence, there would be no chargeable gain that could accrue to Mr Smallwood as settlor even though he and the trustees were UK resident within the year of assessment and would otherwise have been chargeable to tax on the gains under s.77 and s.2 TCGA.
7. The scheme was implemented in the following manner. In December 2000 KPMG Bristol received confirmation from Lutea that it was going to retire as trustee in favour of a Mauritian company, KPMG Peat Marwick International Limited ("PMIL"). The necessary deeds of retirement and appointment were prepared and on 19^th December 2000 Lutea retired and Mr Smallwood exercised the power of appointment vested in him under the Settlement in favour of PMIL. It is common ground that PMIL was at all material times tax resident in Mauritius and on 29^th December 2000 the Settlement was registered as an offshore trust in the Register of Offshore Trusts in accordance with s.29 of the Mauritius Offshore Business Activities Act 1992.
8. On 10^th January 2001 the FirstGroup shares were sold. The Billiton shares were sold on 26^th January 2001. On 2^nd March 2001 PMIL resigned as trustee in favour of Mr and Mrs Smallwood. From then until 5^th April 2001 the trustees were therefore resident and ordinarily resident in the UK. Following its retirement as trustee, PMIL arranged for the Settlement to be de-registered as an offshore trust in Mauritius. On 21^st September 2001 PMIL submitted a tax return to the revenue authorities in Mauritius in respect of the income of the Settlement. The UK return by Mr and Mrs Smallwood as trustees of the Settlement for the 2000-2001 year of assessment claimed double taxation relief in respect of the gains which accrued on the sale of the shares. The claim was disallowed by HMRC and the closure notice served on the trustees amended their return to include the full amount of the gain of £6,818,390. The second closure notice was served on Mr Smallwood and amended his personal tax return by including the chargeable gain on the shares in accordance with s.77(1) TCGA.
9. The appeal against these notices therefore turns on the validity of the claim by the trustees for double taxation relief. Section 277 TCGA makes provision for relief from double taxation in relation to capital gains tax by reference to the equivalent provisions in Part XVIII of the Taxes Act. Relief is therefore available once an Order in Council declares that the arrangements specified in the Order have been made with the government of the relevant country outside the UK: see s.788(1) TA 1988.
10. In the case of Mauritius, these provisions are contained in the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 (SI 1981 No. 1121). The terms of the DTA are scheduled to the Order. They largely reproduce the terms of the 1977 OECD Model Convention on the double taxation of income and capital. The principal sections relevant to these appeals are as follows:-

"Article 1: Personal scope

1. This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2: Taxes covered

2(1) The existing taxes to which this Convention shall apply are:

(a) in the United Kingdom of Great Britain and Northern Ireland:

(i) the income tax;

(ii) the corporation tax; and

(iii) the capital gains tax;

(hereinafter referred to as "United Kingdom tax");

(b) in Mauritius:

(i) the income tax;

(ii) the capital gains tax (morcellement);

(hereinafter referred to as "Mauritius tax");

…

Article 3: General definitions

…

(d) the terms "a Contracting State" and "the other Contracting State" mean the United Kingdom or Mauritius as the context requires;

(e) the term "person" comprises an individual, a company and any other body of persons, corporate or not corporate;

…

(j) the term "tax" means United Kingdom tax or Mauritius tax as the context requires.

…

Article 4: Residence

4 (1) For the purposes of this Convention, the term 'resident of a Contracting State' means, subject to the provisions of paragraphs (2) and (3) of this Article, any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. The terms 'resident of the United Kingdom' and 'resident of Mauritius' shall be construed accordingly.

(2) Where by reason of the provisions of paragraph (1) of this Article an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall determine the question by mutual agreement.

(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 Contracting State in which its place of effective management is situated.

…

Article 13: Capital gains

13(1) Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which the property is situated.

13(2) Capital 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 gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

13(3) Notwithstanding the provisions of paragraph (2) of this Article, capital gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

13(4) Capital gains from the alienation of any property other than that mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident.

13(5) The provisions of paragraph 4 of this Article shall not affect the right of a Contracting State to levy according to its law a tax on capital gains from the alienation of any property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the five years immediately preceding the alienation of the property.

…

Article 24: Elimination of double taxation

24(1) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

(a) Mauritius tax payable under the laws of Mauritius and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within Mauritius shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Mauritius tax is computed.

…

24(3) Subject to the provisions of the law of Mauritius regarding the allowance as a credit against Mauritius tax of tax payable in a territory outside Mauritius (which shall not affect the general principle hereof):

(a) The United Kingdom tax payable under the laws of the United Kingdom and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within the United Kingdom shall be allowed as a credit against any Mauritius tax computed by reference to the same profits, income or chargeable gains by reference to which the United Kingdom tax is computed.

…

24(4) For the purposes of paragraphs (1) and (3) of this Article, profits, income and chargeable gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention shall be deemed to arise from sources in that other Contracting State."

11. The tax scheme centres on the provisions of Article 13(4). The shares were not property of the type described in Article 13(1)-(3) so that Article 13(4) applies. The trustees contend that the issue of residence falls to be determined at the date of the disposal giving rise to the chargeable gain. On this basis the trustee (PMIL) was at the relevant time resident in Mauritius and the capital gains arising on the sale of the shares are only taxable there. Trustees of settled property are treated for UK tax purposes as "a single and continuing body of persons (distinct from the person who may from time to time be the trustees"): see s.69(1) TCGA. As a consequence, there is no amount on which Mr and Mrs Smallwood as trustees were chargeable to tax in respect of the gains accruing on the disposal of the shares at a time when the trustees were resident in Mauritius and the condition in s.77(1)(b) is not satisfied.
12. The question of residence is, of course, a key factor in relation to income tax and capital gains tax and the DTA applies only to residents of one or both of the Contracting States: see Article 1. To this end, the DTA provides a definition of the term "resident of a Contracting State" in Article 4(1) which Mr Prosser QC, on behalf of Mr and Mrs Smallwood, accepts is engaged by the provisions of Article 13(4). This definition requires the person in question to be liable to taxation in the relevant Contracting State by reason of his domicile, residence, place of management or other similar criterion. PMIL as trustee was clearly resident in Mauritius and the Smallwoods similarly have always been resident and ordinarily resident in the UK, both personally and as trustees. It is also common ground on this appeal that the fact that Mauritius does not tax capital gains is irrelevant to the application of Article 4(1). "Liable to taxation" (the meaning of which I discuss later in this judgment) is a reference to any of the taxes covered by the DTA.
13. Where the Article 4(1) definition leads to a person other than an individual being treated as a resident of both Contracting States then Article 4(3) provides a tie breaker based on the person's place of effective management ("POEM"). This provision of the DTA was used by the Special Commissioners to determine the Smallwoods' appeal on the basis of a finding that the trustees were resident within the meaning of Article 4(1) in both Mauritius and the UK in the period culminating in the time when the shares were sold. To reach this conclusion they interpreted "resident" in Article 4(1) (and therefore Article 13(4)) as meaning chargeable to tax rather than simply physically resident. But this was not HMRC's preferred approach and Mr Prosser criticised it before the judge as wrong both in fact and law.
14. The Special Commissioners' reasoning can be summarised as follows. 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.
15. Article 13 of the DTA 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 DTA 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.
16. The Commissioners' conclusions on this issue are summarised in paragraph 107 of their Decision as follows:-

"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."

17. The Special Commissioners therefore went on to consider the issue of POEM under Article 4(3). 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. "

18. 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 through KPMG Bristol during the period in which PMIL acted as the trustee.
19. On appeal Mr Prosser submitted (and Mann J accepted) that Article 4(3) has no application to this case 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 TCGA. 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 Mr Prosser submitted accordingly 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.
20. As a pointer to this construction of Article 13(4) reliance is placed on the version of Article 13(5) in force in respect of the fiscal year 2000-2001. This is included in the extracts from the DTA quoted in paragraph 10 above. Mr Prosser submits that Article 13(5) adds nothing (and is even positively misleading) if the question of residence under Article 13(4) is open-ended. The reconciliation is that Article 13(4) is directed to residence at the time of alienation and Article 13(5) therefore preserves the right of the UK to tax based on prior residence within a five-year period.
21. Mr Prosser also sought to confirm his suggested interpretation of Article 13(4) by reference to the revised version of Article 13(5) of the DTA which was introduced after April 2001 precisely (it is said) to counter Round the World schemes. It provides that:-

"13(5) The provisions of this Article shall not affect the right of a Contracting State to levy according to its law a tax chargeable in respect of gains from the alienation of any property on a person who is a resident of that State at any time during the fiscal year in which the property is alienated, or has been so resident at any time during the six fiscal years immediately preceding that year."

22. The judge was not impressed by this part of the argument. Nor am I. The introduction of provisions designed to deal with specific schemes and to resolve any issues as to whether they are effective under the existing legislation cannot be construed as statutory admissions that the provisions in their unamended form were inadequate. We are not therefore, in my view, assisted by the later version of Article 13(5) in determining the effect of Article 13(4).
23. Both on this appeal and before the judge Mr Brennan QC for HMRC declined to support the reasoning of the Special Commissioners at least as his primary approach to the issue of liability. He submits that 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. This is made clear by the pre-amble to the UK Statutory Instrument which refers to the purpose of the DTA as being the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on capital gains. 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, he submits, inconsistent with this.
24. Mr Brennan submits that 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.
25. His 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.

Discussion

26. The correct approach to the construction of the DTA is not, I think, controversial. The Special Commissioners adopted the summary by Mummery J (as he then was) in IRC v Commerzbank [1990] STC 285 at page 297 of the principles of interpretation laid down by the House of Lords in Fothergill v Monarch Airlines [1981] AC 251. This summary has subsequently been approved by the Court of Appeal in Memec v IRC [1998] STC 754 as a correct statement of the law. In his judgment, Mummery J said that:-

"(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'. A similar principle is expressed in slightly different terms in McNair's The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is 'the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances'. It is also stated in that work (p 366) that references to the primary necessity of giving effect to 'the plain terms' of a treaty or construing words according to their 'general and ordinary meaning' or their 'natural signification' are to be a starting point or prima facie guide and 'cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them'.

(4) If the adoption of this approach to the article leaves the meaning of the relevant provision unclear or ambiguous or leads to a result which is manifestly absurd or unreasonable recourse may be had to 'supplementary means of interpretation' including travaux préparatoires: per Lord Diplock (at 282) referring to article 32 of the Vienna Convention, which came into force after the conclusion of this double taxation convention, but codified an already existing principle of public international law. See also Lord Fraser (at 287) and Lord Scarman (at 294).

(5) Subsequent commentaries on a convention or treaty have persuasive value only, depending on the cogency of their reasoning. Similarly, decisions of foreign courts on the interpretation of a convention or treaty text depend for their authority on the reputation and status of the court in question: per Lord Diplock (at 283–284) and per Lord Scarman (at 295).

(6) Aids to the interpretation of a treaty such as travaux préparatoires, international case law and the writings of jurists are not a substitute for study of the terms of the convention. Their use is discretionary, not mandatory, depending, for example, on the relevance of such material and the weight to be attached to it: per Lord Scarman (at 294)."

27. Article 31 of the Vienna Convention referred to by Mummery J is in these terms:-

"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."

28. It is important, in my view, to identify what Articles 4 and 13 are designed to achieve in the context of the DTA because, as the judge recognised, this largely colours the interpretation of the provisions themselves. But for the Treaty, residents of the UK and Mauritius or companies operating in both territories would be exposed to the risk of taxation on their income and gains under the laws of each Contracting State. The 1977 Model Convention adopted in the DTA eliminates the possibility of double taxation by what the commentary describes as two categories of rules. The first allocates the right to tax by reference to the situs or source of the taxable income or gain or the place where the person in receipt of the profit is treated as resident for tax purposes. The second category of rules (represented by Article 24) comes into play when the first set of rules leaves both Contracting States as eligible to tax the same gain and operates by allowing tax payable in one Contracting State to be credited against the taxpayers' liabilities in the other.
29. As explained earlier, the provisions of the DTA are given statutory effect in relation to the taxpayers concerned by s.788 TA 1988 as a form of relief against what would otherwise be the relevant tax liability under UK law. But 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.
30. The starting point has to be Article 13. 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.
31. "Enterprise of a Contracting State" is defined in Article 3(1)(g) to mean certain types of enterprise carried on by a resident of a Contracting State. "Resident of a Contracting State" is defined by Article 4(1) to mean a person who is liable to taxation under the law of the relevant Contracting State by reason of his domicile, residence, place of management or any other criterion of a similar nature. This is, however, 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).
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 DTA more generally. The judge took the view that Article 13(4), like the other provisions in the DTA 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.
33. He therefore concluded 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."

34. 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 2000-2001 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. He described the reasoning of the Special Commissioners in these terms:-

"It will be apparent from these analyses that neither [side] adopts the reasoning of the Commissioners as identified above. I have set out their core paragraph (paragraph 107) above. It is not clear to me how they arrive at their conclusion, which involves turning factual residence for part of the year into deemed residence (for tax purposes) for the whole of the year. Thus residence in Mauritius for part of the year turns into deemed residence for the whole of the year; and the same with UK residence. This, I think, is their concept of Treaty Residence. I am afraid I cannot see how it is justified by the wording of the Treaty. There is nothing in the Treaty that requires it; nor is there anything in the UK tax legislation which requires it either. The UK tax provisions set out above create certain tax consequences for gains in a given year if trustees, or beneficiaries, are resident here for part of the year. Where they apply, residence in part of the year gives rise to a charge to tax on gains made in another part of the year, but they do not do so by deeming the residence to be for any period longer than the actual period of residence. They do so simply by defining the gains by reference to the period in which they arise. There is a difference between those approaches, and I do not consider this distinction to be too subtle for the purposes of the Treaty (pace the Commissioners). There is no reason why the Treaty should not acknowledge it, without the need for the creation of the artificial deeming concept created by the Commissioners. There is therefore no warrant for the construction of the Commissioners, and the parties are right to disclaim it. I think that the true analysis lies elsewhere."

35. 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. Article 8(1) and Article 13(3) in which the right to tax is given to the Contracting State in which the POEM is situated are perhaps examples of this. But many of these provisions are permissive only or use criteria which may not be sufficient to limit the right to tax to only one of the Contracting States.
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.
37. 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.
38. As already explained, Mr Prosser's suggested solution is that Article 13(4) has to be read as fixing the date of disposal as the reference point for the determination of residence. He accepts that, for the purposes of the DTA, a person can only be "resident" in one Contracting State. But this is achieved on his argument by looking at the factual position as at the date of disposal and nothing more. If he is right about this and the proper construction of "resident" then 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.
39. The judge accepted Mr Prosser's argument that it is necessary to import into Article 13(4) a reference to the date of disposal because otherwise the provision is unworkable. 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.
40. With respect to the judge, I am not convinced about this. 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 Mr Brennan's basic submission 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.
44. As part of his argument, Mr Brennan relied on Article 24 as providing the means of resolving any issues of double taxation which Article 13(4) might produce. But I reject that submission for much the same reasons as the judge rejected it in paragraph 38 of his judgment. He said that:-

"The other significant point favouring Mr Prosser's analysis is Article 24, which Mr Prosser submits does not work properly (or at all) if one is trying to resolve a conflict between two charges based on residence. I think that he is right about that, and Mr Brennan went so far as to accept that its operation is "a bit obscure" in relation to resolving the competition where two states seek to charge on the basis of successive periods of residence (which is his case as to what should happen here). I do not think that "a bit obscure" really does it justice. It does not really work. The essence of the provision is as follows. Each of the UK and Mauritius will give credit for tax paid on sources from within the other territory. Thus the UK gives credit for Mauritius tax paid where the source of the tax was in Mauritius, and vice versa. Residence is used to help resolve any difficulties of where to start - see Art 24(4). It presupposes that a taxpayer is resident in one, and one only, Contracting State. The presupposition is not explicit, but looking at the mechanics it is apparent that it cannot be made to work if the taxpayer is resident in both states. So Mr Brennan's own resolving mechanism is against him. The Commissioners thought that Article 24 could be made to work by a process of iteration. No-one sought to explain to me how that could work, and I do not see how it can. If a process of iteration is to work, one has to have a starting point. The starting point is not clear - is it to be Mauritius or the UK? That may not matter if there is a process of iteration which gives the same result no matter where one starts, but I do not understand what that process is. And if it were to work I cannot accept that this sort of process, which might be entertaining to mathematicians but not to anyone else, is a sensible basis for construing a Treaty which is supposed to have a practical application. Nor is it practicable to look to Article 27 as a provision of last resort in this sort of case, which Mr Brennan says it is. I have not set it out, but it provides for the resolution of disputes by dealings between the States. The draftsman (or the States) cannot sensibly have thought that this was a practical way of resolving an Article 24 dispute in circumstances such as these. There is an alternative approach which makes that unnecessary, and is therefore more attractive as an answer to the problem of construction. That answer is Mr Prosser's approach."

45. Although my alternative approach to Article 24 is not the same as that adopted by the judge, it has the same consequence. It seems to me that Article 24 fulfils the purpose of providing an ultimate form of relief against double taxation when the earlier provisions of the DTA have the result of allowing the profit to be taxed in more than one Contracting State. This might, for example, arise in the case of a sale of land in Mauritius by a UK resident taxpayer which could be taxable under both Article 13(1) and Article 13(4). In that event it would be necessary to resort to Article 24 to prevent the double charge.
46. In summary, then, 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.
47. What are the consequences of this in the present case? The position reached by the Special Commissioners is what is now Mr Brennan's second line of argument: i.e. that one applies the POEM tie-breaker under Article 4(3). Both sides approached this issue by reference to what the Special Commissioners described as the Mauritius period: i.e. the period up to and including the sale of the shares during which PMIL remained the trustee. This was on the basis that it is in respect of the Mauritius period that the trustees are chargeable to tax in both Contracting States. The Special Commissioners were not asked to consider the issue of POEM over any longer period of time and made no findings of fact in respect of that. The result of adopting the same approach is that the Revenue's appeal will be allowed unless the trustees succeed in upholding their right to double taxation relief on the ground that the Special Commissioners erred in law on the issue of POEM. This is the additional point (not decided by Mann J) which is raised in the respondents' notice.

POEM

48. POEM is not defined in the DTA but was interpreted by the Special Commissioners as meaning the place which is the centre of top-level management: i.e. where the key management and commercial decisions are actually made. This is the test propounded by Professor Dr Klaus Vogel in his Commentary on the OECD Model Convention and has been adopted in German case law. It was also taken to be the correct test by the special commissioner (Mr David Shirley) in Wensleydale's Settlement Trustees v IRC [1996] STC 241. The Special Commissioners took as their formulation of the test a passage in the current Commentary on Article 4(3) of the Model Convention which is in these terms:-

"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."

49. Mr Prosser accepts that this is the test to be applied and that what has to be identified is the place where the real top-level management of the trustee qua trustee occurred rather than the day-to-day administration of the trust. But he submits that the top-level management of a company is usually carried out by its board of directors (as the Commentary suggests) unless it can be shown that the control of the company's affairs was effectively usurped and exercised by some third party and that the directors were content merely to rubberstamp the decisions which were taken. In this case there was, he says, no evidence or finding that KPMG Bristol or Mr Smallwood dictated the decision to sell the shares.
50. It goes almost without saying that, to succeed on the cross-appeal, the taxpayers must establish that the decision of the Special Commissioners on this point contained an error of law of the kind recognised by the House of Lords in Edwards v Bairstow [1956] AC 12. Mr Prosser therefore contends that it was not open to the Special Commissioners to find that the POEM of the trustee (PMIL) was anywhere but in Mauritius at the relevant time and, to have reached the conclusion which they did on the evidence, the Special Commissioners must therefore have applied the wrong test.
51. In their decision they concentrated on the management of the trusts between 19^th December 2000 (when Lutea retired) and 2^nd March 2001 when PMIL retired and was replaced by Mr and Mrs Smallwood. They found in terms that all the actions of PMIL in Mauritius were carried out correctly and were properly documented. This meant that the appropriate meetings took place there and the necessary resolutions were passed. But (in paragraph 133) they said that:-

"Nevertheless during the Mauritius period the influence of Mr Smallwood, who was the settlor and who alone had the power to appoint new trustees, and the guiding hands of Mr Gadd and Mr Turbervill of KPMG Bristol, were evident throughout. We first consider the evidence about the role of KPMG Bristol."

52. The Special Commissioners heard evidence from Mr John Turbervill (a senior manager at KPMG Bristol) and Mr Roger Gadd, one of the directors of the private client department. They said that KPMG Bristol (which had recommended the use of the Round the World scheme to Mr Smallwood) were acting purely as tax advisers and could not tell the trustees what to do. They were in contact with PMIL throughout the tax planning exercise but in order to make sure that what was going on fitted within that exercise. There was a confident expectation that the scheme would be followed through but no more than an expectation. PMIL could still have decided not to sell the shares.
53. The Commissioners also heard evidence from Ms Taher, the departmental manager at PMIL who had responsibility for regulatory compliance, and from Mr Jaye Jingree, the managing director of PMIL. The effect of their evidence and the relevant findings of fact are contained in the following paragraphs of the Decision:-

"136. We accept the evidence of Ms Taher that there was no formal appointment by PMIL as trustee of the Trust for KPMG Bristol to advise PMIL "but then they were all part of the KPMG network, and they had introduced the [Trust] client to us, so it was normal practice for us to deal with another KPMG office; it was normal practice for us to take some advice from the other KPMG offices who were dealing with the particular company or trust". Mr Jingree told us that it was normal practice within his firm to get in touch with the person who had introduced a client and to keep the introducer briefed about progress.

137. In the light of this evidence we find that KPMG Bristol saw themselves as tax advisers to the trustees of the Trust, being first Lutea and then PMIL. There was no formal appointment by PMIL but that was not regarded as necessary as both KPMG Bristol and KPMG Mauritius were "under the KPMG umbrella". With that conclusion in mind we turn to examine the facts relevant to the place of effective management.

The relevant facts

138. The tax planning scheme was devised by KPMG Bristol as tax advisers to Lutea, the previous trustee of the Trust. Mr Smallwood had retired as Chairman of FirstGroup and any restrictions on the sale of the FirstGroup shares had been lifted. A tax efficient way of diversifying the portfolio of investments held for the Trust was needed. The appointment of trustees in Mauritius had been the idea of Mr Turbervill and the details were described to Mr Smallwood as early as August 2000. Mr Smallwood had the power to appoint new trustees. It was Mr Turbervill who approached PMIL and told them about the tax planning proposals and set out the basis of their appointment in the email of 24 November 2000. That made it clear that the confident expectation was that the shares would be sold before 5 April 2001.

139. We accept the evidence of Ms Taher that she did not understand "the basis" referred to in the email of 24 November 2000 as to mean that the sale of the shares was a condition for PMIL to accept the appointment as trustee; her evidence was that the trustees would wish to receive appropriate advice and recommendations. However, she accepted that eventually as part of the tax planning exercise the shares would be sold at some time. We accept the evidence of Mr Jingree that there was no agreement that PMIL would behave in a certain way or make certain decisions as a quid pro quo for the introduction of the Trust. PMIL's duties as trustee were laid down in legislation and in the trust deed and PMIL would only act within the context of what it was allowed to do. We also accept the evidence of Mr Jingree that the whole point of the tax planning exercise was to sell the shares and to realise the gain and to avoid tax on the gain.

140. 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.

141. This view is confirmed by subsequent events. The sale of the FirstGroup shares was not an isolated decision taken by PMIL on 10 January 2001. It had been carefully arranged beforehand by the transfer of the shares to Quilter to be held in their nominee account. Further, Mr Bazzone of Quilter had been told of the tax planning exercise and that Quilter would be asked to dispose of the holding of FirstGroup shares after PMIL had been appointed. It was when Mr Bazzone of Quilter told Mr Gadd on 4 January 2001 that he needed instructions from the new trustees that Mr Turbervill prompted PMIL to get on with what they should be doing. At no time did Mr Bazzone recommend the sale of all the shares but the sale of all the shares fitted in with the tax planning scheme. When Mr Bazzone wrote on 6 January to PMIL about the sale of the shares Mr Jingree was away from the office and Mr Shah asked Mr Turbervill for advice. There was then a delay in PMIL receiving the deed of indemnity and Mr Turbervill sent his email of 8 January to PMIL, Lutea and Mr Bazzone that no instructions to sell the shares should be given until the deed had been received. PMIL also asked Mr Turbervill to help with the opening of the account with Quilter and Mr Turbervill suggested an investment objective of capital growth with medium risk. Even on the date of the decision to sell Mr Bazzone had to remind PMIL how many FirstGroup shares were to be sold. Mr James Baxter of Merchant took the initiative in obtaining a set of account opening forms for Merchant.

142. We accept the evidence of Mr Jingree that the sale of the shares was motivated by United Kingdom tax planning reasons. The purpose of selling all the shares was to ensure that the tax planning which had been put in place worked to the best advantage of the Trust and it was vital that all of the shares were sold prior to the end of March in order to achieve this. The decision to sell all the shares was made in the hope that all the shares could be sold before the end of March. However, if it had not been in the interests of the beneficiaries and the Trust, the trustees would not have sold the shares; "if the funds which had been realised had to go away in taxes then it would not have been in the best interests of the beneficiaries". Also, if the share price dropped dramatically, and if the fund manager had advised against a sale, then the trustees would not have decided to sell. We also accept the evidence of Ms Taher that the decision to sell all the shares was based upon tax planning and the need for the shares to be sold by a particular date. The fact that the share price had gone up was not the "driver" for the sale of the shares.

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. We remark that PMIL's fee note was approved by Mr Turbervill.

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."

54. Mr Prosser says that none of these findings amounts to or includes one to the effect that KPMG or Mr Smallwood dictated or usurped the decision of PMIL to implement the scheme by selling the shares. Although the sales took place in accordance with the scheme devised and recommended by KPMG, the decision to sell remained that of PMIL acting through its own directors.
55. In the earlier part of their decision the Special Commissioners set out in some detail the steps leading up to the sale of the shares and the various meetings of PMIL when the decision to sell was taken following advice in January that the share price was rising and that the trustees might now consider a disposal. But those steps were taken in the context of the framework and timescale set out by the scheme. Mr Jingree knew that if the scheme was to be implemented the shares had to be sold before the end of March to allow the trusteeship to be transferred to the UK.
56. So at paragraphs 42-44 of the Decision, the Commissioners record that:-

"42 On 4 January 2001 Mr Bazzone telephoned Mr Gadd and said that he had received the share certificates for the FirstGroup shares from Lutea but had not received any notification from the new trustees. The shares were showing a price of £2.60 but instructions were needed from the trustees. Mr Bazzone thought it would be difficult to sell all the shares in one go but they could possibly be disposed of in tranches and he would await instructions from the offshore trustees. Mr Gadd told Mr Turbervill that he had spoken to Mr Bazzone who was recommending that the shares be sold and asked Mr Turbervill to find out what was going on in Mauritius.

43. Mr Turbervill then telephoned Mauritius to find out what was happening and to prompt them to get on with anything that they should be doing or that he thought they should be doing. He spoke to Mr Shah of PMIL and "asked for an update". Mr Turbervill mentioned that Mr Bazzone (of Quilter) thought that the FirstGroup share price was very favourable at £2.56 and that he advised that they should all be sold. Mr Shah said that Mr Jingree was out but if an email were sent outlining the advice it would be dealt with more quickly. Mr Turbervill made a note for himself that it was advisable for Quilter to have an engagement letter with PMIL.

44. We accept the evidence of Mr Bazzone that at no time did he recommend that all the shares should be sold. Mr Turbervill told us that he interpreted what Mr Bazzone had said as that all the shares should be sold which fitted in with the original tax planning scheme."

57. The findings of the Special Commissioners are to the effect that the tax scheme recommended by KPMG Bristol was implemented by PMIL in accordance with their advice. The impetus to comply with the scheme and to sell the shares with sufficient time to allow the Smallwoods to be appointed as trustees before 5^th April 2001 came from KPMG Bristol who, naturally enough, were concerned to ensure that their advice was followed. The assumption by the Special Commissioners that the trustees had an ultimate right to decline to sell the shares was a factor to be weighed in the balance against that.
58. Mr Prosser submitted that, on the findings of fact made by the Special Commissioners, the board of PMIL had itself taken the decisions necessary for the conduct of the company's business as trustee and therefore exercised effective management. He places particular reliance on the decision of the Court of Appeal in Wood v Holden [2006] EWCA Civ 26 where the issue was whether a company which disposed of shares as part of a tax scheme was resident in the UK. It was common ground that this question fell to be answered by applying the test set out by the House of Lords in De Beers Consolidated Mines Ltd v Howe [1906] AC 455 which is that a company resides where the central management and control actually abides. A finding on this basis that the company was resident in the UK would have led to a consideration in that case of the DTA between The Netherlands and the UK which contains the tie-breaking provisions of Article 4(3). Chadwick LJ expressed the view that it was difficult to draw any meaningful distinction between the two tests but that even if they did in fact differ in substance, they were unlikely to lead to different results.
59. The importance of the case for present purposes lies in the analysis by Chadwick LJ of what is capable of constituting management and control of a company by persons who are not its directors. Referring to the treatment of this issue by Park J at first instance, he said this:-

"[26] At para [26] of his judgment the judge had examined four cases in which (as he said) the courts had recognised the considerations to which he had just alluded. Those cases were Re Little Olympian Each Ways Ltd [1995] 1 WLR 560, Esquire Nominees Ltd v Comr of Taxation (1971) 129 CLR 177, New Zealand Forest Products Finance NV v Comr of Inland Revenue [1995] 2 NZLR 357 and Untelrab Ltd v McGregor (Inspector of Taxes) [1996] STC (SCD) 1. He accepted, of course, that each of those cases was decided on its own facts; but 'they do have some common features which … are relevant to the present case'. He identified those features at para [27]:

'[27] … They all involved persons based in one jurisdiction (commonly a high tax jurisdiction) causing companies to be established in other jurisdictions (commonly low or no tax jurisdictions). In all the cases the companies so established were intended to fulfil particular purposes which were ancillary to the activities of the persons who caused them to be established. In all the cases the local managements did not take initiatives, but responded to proposals (described in some passages in the judgments as instructions) which were presented to them. In all the cases they did implement the proposals, and it is obvious that, when the foreign companies had been established, the confident expectation was that they would implement the proposals. In general, although large amounts of money may have been involved, the functions which the companies were established to fulfil did not involve much regular activity, so there was no great need for frequent exercises of central management and control.

And he observed that:

… except for Unit Construction v Bullock, Mr Brennan did not refer me to any case which might give a different impression of the law from the four cases which I have described. Further, in all four of them Unit Construction v Bullock was expressly distinguished. The essential ground of distinction was that, whereas in Unit Construction v Bullock the parent company itself exercised central control and management of the African subsidiaries, effectively by-passing the local boards altogether, in the four cases the parent companies or their equivalents, while telling the local boards what they wished them to do, left it to the local boards to do it.'

[27] In my view the judge was correct in his analysis of the law. In seeking to determine where 'central management and control' of a company incorporated outside the United Kingdom lies, it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs are 'usurped'—in the sense that management and control is exercised independently of, or without regard to, those constitutional organs. And, in cases which fall within the former class, it is essential to recognise the distinction (in concept, at least) between the role of an 'outsider' in proposing, advising and influencing the decisions which the constitutional organs take in fulfilling their functions and the role of an outsider who dictates the decisions which are to be taken. In that context an 'outsider' is a person who is not, himself, a participant in the formal process (a board meeting or a general meeting) through which the relevant constitutional organ fulfils its function."

60. The Special Commissioners said that Wood v Holden and the other authorities on residence did not ultimately assist on the question of where the POEM of PMIL was situated. They pointed out that the purpose of the Article 4(3) test is to allocate the right to tax between Contracting States, each of which regards the company as resident for tax purposes. The question in this case is not whether PMIL was resident in the UK, but where it was effectively run:-

"POEM, on the other hand, must be concerned with what happens in both states since its purpose is to resolve residence under domestic law in both states, caused for whatever reason, which could include incorporation in one state and management in the other, or different meanings of management applied in each state, or different interpretations of the same meaning of management applied in each state, or divided management. One must necessarily weigh up what happens in both states and according to the ordinary meaning to be given to the terms of the treaty in their context (to quote article 31 of the Vienna Convention on the Law of Treaties) decide in which state the place of effective management is found. Effective is used elsewhere in the OECD model and the Treaty in "effectively connected" in articles 10, 11 and 12 which is an odd use of English. We believe "effective" should be understood in the sense of the French effective (siège de direction effective) which connotes real, French being the other official version of the Model, though not of the Treaty. In our hypothetical example of de Beers being a dual resident, it then becomes material to what level of management the effective management refers, and only then is it relevant to discuss whether the level of effective management is similar to the level of CMC. Fortunately matters of that sort do not arise in this appeal. Accordingly, having regard to the ordinary meaning of the words in their context and in the light of their object and purpose we approach the issue of POEM as considering in which state the real management of the trustee qua trustee is found."

61. Although the purpose of the POEM test is effectively to decide between two rival claims to tax based on residence, the terms of the test, as set out in paragraph 24 of the Commentary quoted above, seem to me to lead inevitably to the question whether the effective decision by PMIL to implement the tax scheme and to sell the shares was taken by the board of directors of that company, albeit on the advice and at the request of KPMG Bristol, or whether the PMIL board effectively ceded any discretion in the matter to KPMG by agreeing to act in accordance with their instructions. Given that the directors of PMIL remained in place and exercised their powers as directors to effect the sale, the approach to this issue suggested by Chadwick LJ in Wood v Holden must be the right test.
62. The conclusion of the Special Commissioners (in paragraph 140 of their Decision) that the key decisions were made in the UK where the realistic, positive management of the trusts remained is said to be based on the facts surrounding the appointment of PMIL. It is clear that they were appointed as part of a pre-existing scheme which involved choosing Mauritius as the situs of the trust because of its favourable treatment of capital gains. It is equally clear that PMIL accepted the trusteeship on the basis that the shares would be sold as part of that tax planning exercise and that the shares were indeed sold in accordance with the scheme. But the Special Commissioners also accepted Mr Jingree's evidence that there was no agreement that PMIL would behave in a certain way or make certain decisions as a quid pro quo for the introduction of the trust and that had the sale of the shares not been in the interests of the beneficiaries as at the date of the sale then PMIL would not have agreed to sell.
63. I find it difficult to accept that on the basis of these findings the Special Commissioners could properly have concluded that the POEM of the trustees up to March 2001 lay in the UK rather than in Mauritius. The findings made do not go beyond saying that PMIL accepted the advice of KPMG to proceed with and implement the scheme in the interests of the beneficiaries. But they retained their right and duties as trustees to consider the matter at the time of alienation and did not (on the Special Commissioners' findings) agree merely to act on the instructions which they received from KPMG. The function of the directors was not therefore usurped in the sense described in Wood v Holden. It seems to me to follow that the Special Commissioners' conclusions are not ones which were therefore open to them on the evidence or on the findings of fact which they made.
64. I would therefore uphold the order of Mann J on this alternative ground and dismiss the appeal.

Lord Justice Hughes :

65. I agree with the conclusions of Patten LJ on the meaning of Article 13(4). In Article 4(1) of the Double Taxation Agreement, the term 'resident of a contracting State' means a person who, under the law of that State, is liable to taxation there by reason of his…residence. The trustees were. Article 13(4) does not require the operation of the "snapshot" approach, for which I can see no warrant. It could not in any event apply to the case of the truly concurrent resident, individual or corporate. Article 13(4) does not remove the right of either State which taxes the gain on the basis of residence; on the contrary it preserves it. Like Patten LJ I am unable to accept the Revenue's submission that Article 24 solves the problem of double residence, and for the reasons which he, and the Judge, have given. The solution, if there is double residence, lies in Articles 4(2) for individuals and 4(3) for a company.
66. On the issue of POEM, with suitable hesitation, I respectfully differ from Patten LJ.
67. The Special Commissioners' conclusion on the issue of POEM was one of fact. The taxpayers can succeed on their cross-appeal only if the Special Commissioners reached a conclusion of fact which was simply not available to them, and thus made an error of law: Edwards v Bairstow [1956] AC 12.
68. If the question were the POEM of the particular trust company trustee for the time being at the moment of disposal, namely PMIL, then it may be that the reasoning in Wood v Holden [2006] EWCA Civ 26 would justify the conclusion that the Commissioners fell into this kind of error. I agree that their findings do not go so far as findings that the functions of PMIL were wholly usurped, and I agree that Wood v Holden reminds us that special vehicle companies (or, no doubt, special vehicle boards of trustees) which undertake very limited activities are not necessarily shorn of independent existence; indeed they would be ineffective for the purpose devised if they were.
69. But it seems to me that to apply this reasoning to the present case is to ask the wrong question, and indeed to return to the rejected snapshot approach. The taxpayers with whom we are concerned under section 77 are the trustees. Trustees are, by section 69(1) TCGA 1992, treated as a continuing body:

"In relation to settled property the trustees of the settlement shall for the purpose of this Act be treated as being a single and continuing body of persons (distinct from the person who may from time to time be the trustees) and 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."

The POEM with which this case is concerned is, as it seems to me, the POEM of the trust, i.e. of the trustees as a continuing body. That is the question which the Special Commissioners addressed: see their paragraphs 140 and 145.

70. On the primary facts which the Special Commissioners found at paragraphs 136-145, which are set out in the judgment of Patten LJ, I do not think that it is possible to say that they were not entitled to find that the POEM of the trust was in the United Kingdom in the fiscal year in question. The scheme was devised in the United Kingdom by Mr Smallwood on the advice of KPMG Bristol. The steps taken in the scheme were carefully orchestrated throughout from the United Kingdom, both by KPMG and by Quilter. And it was integral to the scheme that the trust should be exported to Mauritius for a brief temporary period only and then be returned, within the fiscal year, to the United Kingdom, which occurred. Mr Smallwood remained throughout in the UK. 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.
71. I would therefore allow the appeal.

Lord Justice Ward :

72. I agree with my Lords that, for reasons given by Patten L.J., Article 4(3) and the ascertainment of the place of effective management of the Trust, not the snapshot approach, provides the solution to the problem.
73. As for POEM, I agree with Hughes L.J. for the reasons he gives.
74. That means that H.M. Revenue and Customs win.