© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Control and influence
GENERAL
Relevant level of control
- Section 450: shareholder level
"[149] In Newfields Lord Hoffmann referred at [10] to what is now s450(2) (then the opening words of s416(2) Income and Corporation Taxes Act 1988) as describing “a concept of control which reflects its meaning in ordinary speech”, which is then “enormously widened” by subsequent subsections. Lord Scott referred to the same provision as prescribing a “test of actual control”, with subsequent provisions describing other situations where a person is taken to have control, even where another person has control under another part of the test, such that control could be attributed to several different people (paragraphs [41] and [42]). In Kellogg Lord Neuberger MR (as he then was) referred at paragraph [34] to these comments in Newfields as confirming the approach of giving the opening part of s416(2) its ordinary meaning, not an artificially narrow meaning because of the scope of the following subsections. In Steele Lightman J concluded at first instance at page 51 that “control over the company’s affairs” referred to control at general meetings rather than at board level, and this was upheld by the Court of Appeal ([1996] STC 785 at 794-5). In UBS the Upper Tribunal referred to these comments in Steele and concluded that they were binding on it and had not been implicitly overruled by House of Lords in Newfields (paragraphs [117] to [124] in the Upper Tribunal decision). In the Court of Appeal decision in UBS it was noted at [92] that HMRC accepted that control in s416(2) meant control at shareholder level, although the conclusion reached was that in the Deutsche Bank appeal the Upper Tribunal had taken the wrong approach in overturning the First-tier Tribunal’s finding that the control test was not satisfied on the facts.
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[153] I do not think that the fact that Mr Barnes alone was funding SMCL is sufficient to establish control under s450(2). It is clear from the case law that control under that provision means control, or the ability to obtain control, at shareholder level. So I think the key question is whether Mr Barnes actually had control at that level, or was able to exercise it or entitled to obtain it. There was no suggestion that Dr Smart was holding the sole share in issue on behalf of Mr Barnes or that Dr Smart had agreed to exercise his right to vote the share as Mr Barnes directed..." (PGPG Limited v. HMRC [2017] UKFTT 782 (TC), Judge Falk)
Close company test
- Limit attributions to what will result in control by 5 or fewer participators
"[11] ... The effect of these cumulative definitions is that for the purpose of deciding whether a person "shall be taken to have control of a company" under section 416(2), it may be necessary to attribute to him the rights and powers of persons over whom he may in real life have little or no power of control. Plainly the intention of the legislature was to spread the net very wide." (IRC v. Newfields Developments Limited [2001] UKHL 27, Lord Hoffmann)
- Only applies for the purpose of the close company test, not other uses of the definition of control
"[32] In my opinion, therefore, the concluding words of subsection (6) do not form part of the definition of "control" which is applied by section 13(4) and other sections. They are a special qualification of that definition for the specific purpose of deciding whether one limb of the definition of a close company is satisfied. The concluding words take effect only when one has applied the general definition of control in section 416(2) or (3) as extended by the preceding part of the subsection and found that it can yield groups of participators of varying numbers who can each be treated as being in control. The concluding words then require one to make only such attributions as will result in the company being treated as under the control of five or fewer participators. But this qualification has no relevance to any case in which the general definition of control, as set out in the rest of section 416(2) to (6), is sufficient to answer the statutory question." (IRC v. Newfields Developments Limited [2001] UKHL 27, Lord Hoffmann)
Inheritance tax
- Control of voting on all questions affecting the company
"(1)For the purposes of this Act a person has control of a company at any time if he then has the control of powers of voting on all questions affecting the company as a whole which if exercised would yield a majority of the votes capable of being exercised on them.
(2)For the purposes of this Act shares or securities shall be deemed to give a person control of a company if, together with any shares or securities which are related property within the meaning of section 161 above, they would be sufficient to give him control of the company (as defined in subsection (1) above).
(3)Where shares or securities are comprised in a settlement, any powers of voting which they give to the trustees of the settlement shall for the purposes of subsection (1) above be deemed to be given to the person beneficially entitled in possession to the shares or securities (except in a case where no individual is so entitled).
(4)Where a company has shares or securities of any class giving powers of voting limited to either or both of—
(a)the question of winding up the company, and
(b)any question primarily affecting shares or securities of that class,
the reference in subsection (1) above to all questions affecting the company as a whole shall have effect as a reference to all such questions except any in relation to which those powers are capable of being exercised." (IHTA s.269)
PARTNERSHIP CONTROL
- Right to share in more than half the assets or half the income
"(1)This section has effect for the purposes of the provisions of the Corporation Tax Acts which apply this section (or to which this section is applied).
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(3) In relation to a partnership, “control” means the right to a share of more than half the assets, or of more than half the income, of the partnership." (CTA 2010, s.1124)
EFFECT OF CONTROL
- Board resolution of sole director company restricting sole director from private use of vehicle accepted as restriction on such use
"[9] The tribunal heard evidence from Mr Phillips, whom it accepted as a witness of truth. It found that the car was purchased for business use and also that the company and Mr Phillips intended to be bound by the board resolution (decision paras 10 and 11).
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[40] In the present case the prohibition was backed up by the terms of Mr Phillips' employment and in addition the arrangements as to the location of the keys. The tribunal accepted Mr Phillips' evidence that he intended to be bound by the terms of the board resolution prohibiting from using the car for private use. There is no doubt that a company can enter into a binding employment contract with its sole director, even where that director is also the controlling shareholder: see Lee v Lee's Air Farming Ltd [1961] AC 12, a decision of the Privy Council. Mr Paines contends that the restrictions are worthless in this case because they can be revoked at any time by Mr Phillips and would be automatically revoked if he were to use the car for private purposes. The first part of that submission is not open to Mr Paines in the light of the tribunal's findings to which I have referred. As to the latter part of that submission, the question whether the restrictions are revoked would depend on what should be inferred to be the intention of the company in that situation. It would not necessarily follow that the intention of the company would be to lift the restrictions rather than to enforce any remedy for breach." (CEC v. Elm Milk Limited [2006] EWCA Civ 164, Arden LJ)
- Board resolution of sole director company restricting sole director which was not intended to be acted upon would be ignored
"[23] If the tribunal had found that the resolution was never intended to be acted upon, but was merely a piece of window dressing aimed at Customs and Excise, the tribunal would no doubt have dismissed the appeal. A further appeal from a decision of that sort by Elm Milk to this Court would have had little chance of success. But in my judgment the same is true in reverse where, as happened in this case, the tribunal found that the resolution was genuine and was properly to be taken into account in determining the value added tax effects of Elm Milk's acquisition of the car. I set out my own analysis and views in more detail in the following paragraphs." (CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), Park J, approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
- Close scrutiny of whether contractual condition between family company and director who is member of family
"[31] Hitherto in the foregoing discussion I have tended to concentrate on a hypothetical case of an employer and an employee with no other connection between them. Does it make any difference if the employer is a small family company and the employee is both a member of the family and the sole director of the company? Those are, of course, the actual facts of this case. In my judgment, that does not affect the principle of the matter. If, as I believe, a genuine contractual stipulation against private use of a company car can overcome the obstacle of art 7(2G)(b) as between an employer and an otherwise unconnected employee, then it can equally overcome the obstacle of the paragraph as between a family company and a director who is a member of the family.
[32] I certainly accept that, in that latter situation, the facts may require close scrutiny to ascertain whether the contractual stipulation is genuine. However, in this case they received close scrutiny..." (CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), Park J, approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
- Condition imposed by director of family company precisely in order to satisfy tax test found to be genuine and effective
"[11] These findings are, we recognize, based on a board resolution made by Mr Phillips in relation to his own activities. We also recognize that Elm Milk is a company controlled by Mr Phillips' family. And we recognize that the resolution would not have been made in the absence of Article 7 of the 1992 Order. We have however had the opportunity of hearing evidence from Mr Phillips and considering his replies in the course of cross-examination. Our conclusion is that Elm Milk and Mr Phillips intended to be bound by the terms of the Resolution. Both parties well understood that the condition they had to adhere to, to enable input tax relief to be obtained, was that the Mercedes motor car was not to be made available by Elm Milk for the private use of anyone. By making that resolution Elm Milk was committed and Mr Phillips was committed, both in good faith, to a course of conduct that precluded Elm Milk from making the motor car available to Mr Phillips for private use and Mr Phillips from using it for private use. Mr Phillips, we are satisfied, became contractually bound to Elm Milk by reason of that resolution not to use the Mercedes motor car for private use." (Elm Milk Limited v. CCE [2004] UK V18592, Judge Oliver QC quoted and relied in CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), §33, Park J, in turn approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
- Borrower having control over company that made loan does not mean that loan not genuine
"[98] ... Further, there is in any event no authority for the proposition that the fact that the borrower controls the lender is sufficient to alter the legal character of a loan. It is not. I would add that, were it otherwise, the legal status of the entirely commonplace transaction of a loan to a parent company could be called into question." (HMRC v. Currell [2026] EWCA Civ 445, Falk LJ)
- Subsidiary not deprived of entitlement to occupy because lease is from parent that controls it
"[61] It may be that other factual situations may demonstrate that this test needs some further adjustment. For example the letting of unoccupied business property by a parent company to a wholly owned and controlled subsidiary would not of itself cause the subsidiary to fail to satisfy the ownership test merely because the management of the affairs of the subsidiary (including whether to bring the premises back into occupation) rested with the parent’s board. We would, however, reject the criticism that the test is insufficiently certain. In any ordinary case the test will easily be satisfied by identifying the person who is entitled to possession as matter of the law of real property. The fact that the law of real property may not prove a reliable guide in an unusual case of the present kind is not in our view an objection to our preferred interpretation. The value of legal certainty does not extend to construing legislation in a way which will guarantee the effectiveness of transactions undertaken solely to avoid the liability which the legislation seeks to impose." (Rossendale BC v. Hurstwood [2021] UKSC 16)