Fowler
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 April 2016 |
| Neutral Citation | [2016] UKFTT 234 (TC) |
| Date | 12 April 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Guy Brannan
Jonathan Schwarz, Counsel, instructed by Norton Rose Fulbright appeared for the Appellant
Akash Nawbatt, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Preliminary issue – Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”), s. 15 – Performance of duties of employed diver in UK waters treated as the carrying on of a trade in the UK – Appellant resident in South Africa – Whether income taxable as employment income under South Africa/UK Double Tax Treaty 2002, art. 14 or business profits under art. 7 – Interpretation of Double Tax Treaty in accordance with the Vienna Convention on the Law of Treaties – Application of art. 3(2) South Africa/UK Double Tax Treaty.
The First-tier Tribunal (FTT) ruled on a preliminary issue that a non-resident diver's income from his diving activities in the UK or UK Continental Shelf, within the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 15, fell within art. 7 (Business profits) of the Double Tax Convention of 4 July 2002 (SI 2002/3138) between the UK and South Africa (the Treaty) and not within art. 14 (Income from employment). Art. 3(2) of the Treaty required domestic tax law meaning to be given to the Treaty terms “enterprise”, “business”, “salaries, wages … etc.” and reading s. 15 with art. 3(2) meant the income from diving activities constituted “profits” within art. 7.
Mr Fowler was resident in South Africa for tax purposes but worked as a diver in the UK Continental Shelf sector of the North Sea during the tax years in question. HMRC issued enquiry closure notices on the basis that Mr Fowler's diving income was employment income taxable in the UK under art. 14 of the Double Tax Convention of 4 July 2002 (SI 2002/3138) between the UK and South Africa (the Treaty). Mr Fowler appealed to the Tribunal arguing that his diving income was business profits within art. 7 and was exempt from UK tax because he had no permanent establishment in the UK.
The question of whether Mr Fowler was an employee or self-employed was to be determined at the later full hearing of the appeal. The FTT was required to rule only on the preliminary issue of whether, on the presumption that ITTOIA 2005, s. 15 applied, Mr Fowler would not be liable to income tax in the UK by reason of art. 7 of the Treaty or whether he would be liable by reason of art. 14.
The FTT noted that ITTOIA 2005, s. 15 (Divers and diving supervisors) was a deeming provision which provided that where the taxpayer would otherwise be an employee and the employment income taxable under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), Pt. 2, the employment duties were instead to be treated as the carrying on of a trade in the UK for income tax purposes. Accordingly, for the purposes of determining the preliminary issue, it was presumed that Mr Fowler was an employee and his employment income was otherwise chargeable under ITEPA 2003, Pt. 2.
The FTT then noted the relevant provisions of the Treaty between the UK and South Africa. Art. 7 dealt with business profits and art. 14 dealt with employment income. The question was which of the two articles applied? If art. 7 applied, the income would not be taxable in the UK because Mr Fowler had no permanent establishment in the UK. If art. 14 applied, the income could be taxed in the UK because Mr Fowler did exercise the (presumed) employment in the UK.
For Mr Fowler, it was submitted that art. 7 was the relevant article. The trade that a diver was deemed to carry on by ITTOIA 2005, s. 15 constituted the carrying on of a business for the purposes of the Treaty and gave rise to business profits within art. 7.
For HMRC, it was submitted that the relevant article was art. 14. The fact that UK legislation deemed income of employed divers to be trading income did not alter the fact that the income was derived from an employment. Art. 14 was concerned only with determining which country had taxing rights and the same two pre-conditions applied to art. 14 as applied to ITTOIA 2005, s. 15: (1) the income had to be derived from employment and (2) the employment had to be exercised in the other contracting state (in this case, the UK). Art. 14 was not concerned with how the contracting state taxed the income and the fact that the UK deemed income from an employment to be income from a trade for domestic purposes did not remove the UK's right to tax it under art. 14 of the Treaty.
The FTT noted that art. 3(2) set out a general rule for interpreting terms not defined in the Treaty and provided that any term “shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which this Convention applies,”. The use of the word “shall” indicated that recourse must be had to the relevant provisions of domestic tax law in priority to any other meaning, unless the context otherwise required which meant the words “enterprise”, “business”, “salaries, wages and other similar remuneration derived … in respect of an employment” must be determined in accordance with UK domestic law.
It was clear from the wording of ITTOIA 2005, s. 15 that income derived by Mr Fowler from his UK diving activities was to be treated as trading income and as derived from the carrying on of a trade “for income tax purposes”. The result of the s. 15 deemed trading treatment meant that Mr Fowler's income derived from his diving activities did constitute “profits” within art. 7 of the Treaty.
For completeness, the FTT considered also the words “unless the context otherwise requires” but concluded that there was nothing in the context which required a different meaning to be given from that given by ITTOIA 2005, s. 15.
Accordingly, the FTT decided the preliminary issue in favour of Mr Fowler concluding that, by virtue of ITTOIA 2005, s. 15 when read with art. 3(2) of the Treaty, Mr Fowler's income from his diving activities in the UK or UK Continental Shelf for the years in question fell within art. 7 of the Treaty.
ITTOIA 2005, s. 15 (Divers and diving supervisors) deems duties of an employment as a diver or diving supervisor in the UK or UK Continental Shelf to be treated as the carrying on of a trade in the UK for income tax purposes. This case considers a preliminary issue as to whether this deeming provision operates to simply have the effect that income must be computed in accordance with the rules relating to trading income or whether it goes further with the result that the income falls within art. 7 (Business profits) rather than art. 14 (Income from employment) of the Double Tax Treaty between the UK and South Africa. The point was critical because if the income fell within art. 7, the UK would not be entitled to tax it but if it fell within art. 14, the UK would be entitled to tax it. The FTT found that art. 3(2) required terms of the treaty to be given their UK domestic tax law meaning unless the context otherwise required (which in this case it did not) and accordingly, the income from the diving activities constituted “profits” within art. 7.
[1] This appeal raises a short but difficult point on the interpretation of the South Africa / UK Double Tax Treaty 2002 (SI 2002/3138) (“the Treaty”). The issue arises as a preliminary point in an appeal by Mr Fowler.
[2] Mr Fowler appeals in respect of closure notices for the income tax years ended 5 April 2012 and 5 April 2013.
[3] Mr Fowler is resident, for tax purposes, in South Africa. In the tax years in question he worked as a qualified diver undertaking diving work in the UK Continental Shelf sector of the North Sea.
[4] HMRC decided that Mr Fowler's income from his North Sea diving activities fell within article 14 (Income from Employment) of the Treaty and were, therefore, chargeable to UK income tax. The closure notices were issued on that basis.
[5] Mr Fowler, however, contends that his diving income constitutes business profits falling within article 7 (Business Profits) of the Treaty and were, accordingly, exempt from UK income tax because he has no permanent establishment (within the meaning of article 5 of the Treaty) in the UK.
[6] The question whether Mr Fowler was for the relevant tax years an employee (as HMRC contend) or was self-employed (as Mr Fowler contends) is in dispute.
[7] Even if Mr Fowler was an employee for the relevant tax years, section 15 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) treats the performance of the duties of his employment for income tax purposes as the carrying on of a trade in the UK.
[8] It was against this background that the Tribunal (Judge Poole) directed that the section 15 ITTOIA issue should be determined as a preliminary issue as follows:
Whether, as a matter of law, if section 15 of [ITTOIA] applies to the diving activities of the Appellant during the tax years 2011–12 and 2012–13, the Appellant cannot be liable to income tax in the UK for those years in respect of his income from those activities by reason of article 7, or alternatively article 20, of the [Treaty] or whether the Appellant may be liable to income tax for those years in respect of his income from those activities by reason of article 14 of the Treaty.
[9] Although Judge Poole's Directions referred to article 20 of the Treaty (other income) it was common ground before me that article 20 was not engaged in the present case.
[10] For the purposes of the hearing of this preliminary point, the parties agreed a short Statement of Facts which reads as follows:
1) The Appellant is a qualified diver resident in the Republic of South Africa.
2) During the 2011/2012 and 2012/2013 tax years, he undertook diving engagements in the UK Continental Shelf waters.
3) The Appellant is a resident of South Africa for the purposes of the South Africa-United Kingdom Tax Treaty (SI...
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Green
...in R & C Commrs v Fowler [2017] BTC 518 was being appealed to the Court of Appeal. The appellant had argued that the First Tier Tribunal [2016] TC 05009 had found that the effect of s15 was to recharacterize the employment activities as activities of a trade (at §113) and that, as the Upper......
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Puttnam
...in R & C Commrs v Fowler [2017] BTC 518 was being appealed to the Court of Appeal. The appellant had argued that the First Tier Tribunal [2016] TC 05009 had found that the effect of s15 was to recharacterize the employment activities as activities of a trade (at paragraph 113) and that, as ......