Fowler v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 20 May 2020 |
| Neutral Citation | [2020] UKSC 22 |
| Year | 2020 |
| Court | Supreme Court |
[2020] UKSC 22
Lord Hodge, Deputy President, Lady Black, Lord Briggs, Lady Arden, Lord Hamblen
Income tax – Interpretation of double tax treaty – ITTOIA 2005, s. 15 – Performance of duties of employment in UK waters treated as the carrying on of a trade in the UK – Whether income taxable as employment income under art. 14 or business profits under art. 7 of South Africa/UK Double Tax treaty 2002 – Meaning of employment – ITEPA 2003, s. 4.
The Supreme Court has overturned the Court of Appeal's judgment that employment income deemed to be the profits of a trade by UK domestic legislation was not covered by the employment income article of the relevant double tax treaty.
This was an appeal against an earlier judgment of the Court of Appeal who had found (in favour of Mr Fowler, a resident of South Africa who carried out diving activities in UK waters) that as the term “employment” was not defined in South Africa/UK Double Tax treaty 2002 (the Treaty) it should be ascribed its meaning under UK law, specifically ITTOIA 2005, s. 15, which treated certain diving activities as the carrying on of a trade, with the result that art. 14 (applicable to employment income) of the Treaty did not give the UK taxing rights.
Lord Briggs, giving a unanimous judgment, did not agree with the Court of Appeal's view that, because the effect of s. 15(2) was to treat Mr Fowler's duties of his actual employment as the carrying on of a trade in the UK, that deemed trade was the only source, for income tax purposes, from which taxable income could arise to Mr Fowler.
This was because the meaning of the term “employment” had to be ascertained by reference to UK income tax law as it was not defined in the Treaty (art. 3(2)), but that did not mean that it should take on a meaning applied in a “fictional, deemed world created by UK income tax legislation”. Instead its “real” meaning found in ITEPA 2003, s. 4 should be applied and this would clearly treat Mr Fowler's remuneration as employment income. ITTOIA 2005, s. 15 did not change this meaning but instead provided that employment income was “to be taxed as if, contrary to the fact” it was profits of a trade. Moreover, the purpose of s. 15 was not to decide whether certain divers were to be taxed in the UK on their employment income, but rather how they were to be taxed and, consequently. applying the deeming provision for the purposes of the Treaty so as to take the income outside the scope of UK tax would be contrary to its purpose.
Given that the judgment of the Court of Appeal was not unanimous, it is not surprising that HMRC appealed to the Supreme Court. It is also worth noting that, had the taxpayer succeeded, the result could have been that the income would not have been taxed in either territory, as Mr Fowler would probably have been treated in South Africa as an employee and domestic South African legislation did not tax the earnings of residents employed abroad.
Akash Nawbatt QC, Colm Kelly (Instructed by HMRC Solicitor's Office (Salford)) appeared for the appellant
Jonathan Schwarz (Instructed by KPMG LLP (London)) appeared for the respondent
[1] Mr Martin Fowler is a qualified diver, resident in the Republic of South Africa. During the 2011/12 and 2012/13 tax years he undertook diving engagements in the waters of the UK Continental Shelf. Although his status has yet to be determined, the preliminary issue which is the subject of this appeal requires it to be assumed that he undertook those engagements as an employee, rather than as a self-employed contractor.
[2] HMRC claim, but Mr Fowler denies, that the income which he earned from those diving engagements is subject to UK taxation. That depends on how the double taxation treaty between the UK and South Africa (“the Treaty”) applies to a person in his position. In a nutshell, the Treaty provides for employment income to be taxed in the place where it is earned, in the present case in the UK, but for the earnings of self-employed persons to be taxed only where they are resident, in Mr Fowler's case in South Africa. Thus far the answer might appear to be simple. If (as is to be assumed) Mr Fowler was an employee, then he should be taxable only in the UK.
[3] But the matter is complicated by two factors. The first is that employed divers doing the particular kind of diving work in UK waters which Mr Fowler did are, under UK tax law, to be treated as if they were self-employed for income tax purposes. The second is that terms used in the Treaty, if not defined in the Treaty itself, are to be given the meaning which they have in the tax law, or the general law, of the state seeking to recover tax, here the UK. Thus, if the effect of the UK tax law's requirement to treat Mr Fowler as if he was self-employed is to govern the meaning of relevant terms in the Treaty, the outcome might be that he was to be treated as self-employed under the Treaty, and therefore taxable, if at all, in South Africa.
[4] This was the conclusion of the majority in the Court of Appeal, from which HMRC appeals to this court. In fact, such an outcome could mean that Mr Fowler was not taxable in either country, because the question whether he was taxable in South Africa would not be governed by the meaning of Treaty terms established by reference to UK tax law. He would probably be treated in South Africa as an employee. To the extent that domestic South African tax legislation did not tax the earnings of residents employed abroad he would not be taxable there or in the UK. There is no general provision in this Treaty, as there is in many others, to deal with what is called “double non-taxation”. But the question whether South Africa did tax the earnings of its residents employed abroad was not investigated in these proceedings so it would be inappropriate to place any weight on this consideration in construing the Treaty.
[5] The Double Taxation Treaty between the UK and South Africa takes the form of a Convention ( and is described in the Treaty as “the Convention”) which came into force in the UK by means of the Double Taxation Relief (Taxes on Income) (South Africa) Order 2002 (SI 2002/3138), being annexed to the order in the form of a Schedule. Its preamble recites that it had been agreed for the purpose of promoting and strengthening the economic relations between the two countries, avoiding double taxation and preventing fiscal evasion. For present purposes the most relevant provisions are as set out below. Other provisions will be mentioned in due course.
[6] Article 1 headed “Persons Covered” provides that:
This Convention shall apply to persons who are residents of one or both of the Contracting States.
Article 2 headed “Taxes Covered” provides in paragraph (1) that:
This Convention shall apply to taxes on income and on capital gains imposed on behalf of a Contracting State or of its political subdivisions, irrespective of the manner in which they are levied.
[7] Article 3 is a definition provision. Paragraph (1) contains a number of specific definitions, some exclusive and some non-exclusive, and all under the preamble “unless the context otherwise requires”. Only three need be quoted.
- (d) the term business includes the performance of professional services and of other activities of an independent character; …
- (g) the term enterprise applies to the carrying...
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