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July 17, 2017

UPDATE: Effect of UK Law on Double Tax Treaties Revisited

The case of M. F. Fowler v HMRC concerns the application of UK tax law, and how this interacts with international double tax arrangements.

In 2016, the First-Tier tribunal ruled in the taxpayer's favour (a review of the initial case may be found here) and held that the undefined terms in the UK-South Africa double tax treaty must be interpreted according to domestic law. On this basis Mr Fowler's income was "trading income" and therefore not chargeable to UK tax.

In this case the Upper Tribunal overturned the previous decision on appeal and held that the income was in fact to be treated as employment income, and therefore a liability to UK tax should arise.

The Facts

Mr Fowler, a South African resident, worked as a diver in the North Sea on the UK’s continental shelf in 2011/12 and 2012/13. The initial case concerned the taxpayer’s earnings from this undertaking.

HMRC sought to argue that the earnings were employment income under Article 14 of the UK-South Africa double tax treaty, and therefore subject to income tax in the UK.

The taxpayer contended that the earnings were business profits and therefore exempt from tax in the UK under Article 7 of the double tax treaty.

The taxpayer also put forth an alternative case. Under ITTOIA 2005 s.15, where the performance of duties of employment consist of seabed diving activities, those duties are treated as the carrying on of a trade. The alternative case was therefore that, even if the income was from employment (under Article 14 DTT), the effect of s.15 would be to bring such income within Article 7 of the double tax treaty, exempting it from UK tax.

This alternative argument was decided to be a preliminary issue in the initial case, and was decided in the favour of the taxpayer. The appeal concerns this decision.

The Case

Significant weight was given to the meanings of ‘employment’ and ‘employment income’ for the purposes of interpreting the relevant legislation.

The taxpayer’s representatives contended that the connection between ‘employment’ and ‘employment income’ was so close, that both terms should be viewed as one, and together provided the meaning of the term ‘an employment’ in Article 14.

HMRC argued that the defining term in Article 14 was ‘employment’, rather than ‘salaries, wages and other similar remuneration derived…in respect of an employment’.

The Decision

The Upper Tier Tribunal decided in favour of HMRC’s interpretation. They provided two reasons for this:

  1. The right to tax was allocated according to where the employee was a resident and the location of the employment. The benefits of that employment did not restrict its scope.
  2. The ‘catch-all’ of ‘other similar remuneration’ was intended to ensure that all benefits derived from an employment are caught.

The tribunal concluded that the term ‘an employment’ should be interpreted through English Law. The deeming provision contained in ITTOIA 2005 s.15 would not be relevant as it instead concerns ‘employment income’.

On the basis that the taxpayer was employed and not self-employed, it was held that their UK diving activities fell within Article 14 of the double tax treaty and was therefore liable the UK tax.

The case may be read in full here, and contains an interesting discussion on the interpretation of tax treaties.

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