Fowler v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Lewison,Lord Justice Baker,Lord Justice Henderson
Judgment Date15 November 2018
Neutral Citation[2018] EWCA Civ 2544
Docket NumberCase No: A3/2017/2372
Date15 November 2018

[2018] EWCA Civ 2544



(Tax and Chancery Chamber)

Judge Guy Brannan


Royal Courts of Justice

Strand, London, WC2A 2LL


Lord Justice Lewison

Lord Justice Henderson


Lord Justice Baker

Case No: A3/2017/2372

The Commissioners for Her Majesty's Revenue and Customs

Jonathan Schwarz (instructed by Norton Rose Fulbright LLP) for the Appellant

Akash Nawbatt QC and Colm Kelly (instructed by HMRC) for the Respondent

Hearing date: 23rd October 2018

Lord Justice Lewison

Mr Fowler is a qualified diver and a resident of South Africa. In the tax years 2011/2012 and 2012/2013 he undertook diving engagements in the waters of the UK continental shelf. The governments of the UK and South Africa are parties to a Double Taxation Treaty which came into force on 17 December 2002. It is based on the OECD model form of double taxation treaty. The question raised on this appeal is which of them is entitled to levy tax on Mr Fowler's income derived from his diving activities during those two tax years. It is common ground that if Mr Fowler was self-employed, the answer is South Africa. But whether he was in fact self-employed is in dispute. In those circumstances the First Tier Tribunal directed the trial of a preliminary issue. At the risk of some over-simplification the issue was whether, on the assumption that Mr Fowler was an employee during those years, the effect of the UK's domestic taxation legislation meant that he was treated as if he were carrying on a trade with the consequence that the UK was not entitled to tax his income from those activities. Judge Brannan in the FTT answered that question in Mr Fowler's favour, but Marcus Smith J, sitting in the Upper Tribunal, reversed that decision. The decision of the Upper Tribunal is at [2017] UKUT 219 (TCC), [2017] STC 1385.


It is important to stress at the outset that the fundamental question on the appeal is who has the right to tax Mr Fowler's diving income: not how the Government with that right chooses to exercise it. The two questions are separate questions: Smallwood v HMRC [2010] EWCA Civ 778, (2010) 80 TC 536 at [28] to [29]. Who has the right to tax in turn depends on what is being taxed.


The principles applicable to the interpretation of international treaties are well-known. They are set out in articles 31 and 32 of the Vienna Convention on the Law of Treaties; and have been amplified by such cases as IRC v Commerzbank AG [1990] STC 285 and Anson v HMRC [2015] UKSC 44, [2015] STC 1777.


The two competing articles of the treaty are article 7 and article 14. Article 7 applies to business profits. It provides:

“(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”


The treaty defines “enterprise of a Contracting State” as meaning an enterprise carried on by a resident of a Contracting State. The treaty provides that the term “enterprise” applies to “the carrying on of any business”; and defines “business” as including the performance of professional services and of other activities of an independent character. It is common ground that because Mr Fowler is a resident of South Africa and does not have a “permanent establishment” in the UK, this article would allocate the right to tax him to South Africa if he was in fact self-employed. Article 7 (6) provides:

“Where profits include items of income or capital gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.”


Although the judge thought otherwise, in my judgment the effect of article 7 (6) is that articles applicable to specific categories of income have priority over article 7. That seems to me to be the natural meaning of the language. It was also the purpose of the authors of the OECD model treaty in including article 7 (6) (see commentary on article 7 para 74, which is a permissible aid to the interpretation of the treaty: Smallwood at [26] (5) approving Commerzbank; Provost Car Inc v Canada [2009] FCA 57, [2010] 2 FCR 65 at [11]). Accordingly, that makes it necessary to consider article 14. If article 14 applies, then article 7 does not.


Article 14 (1) applies to income from employment. It provides:

“Subject to the provisions of Articles 15, 17 and 18 of this Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.”


Mr Fowler's diving activities were exercised in the UK. If those activities generated remuneration “in respect of an employment” then the UK has the right to tax them.


I should also refer to article 2 of the treaty which provides:

“This Convention shall apply to taxes on income and on capital gains imposed on behalf of a Contracting State … irrespective of the manner in which they are levied.”


As noted, the treaty contains a number of definitions. However, “employment” is not a defined term. Article 3 (2) provides:

“As regards the application of the provisions of this Convention at any time by a Contracting State, any term not defined therein 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, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.”


So the first question is: what is the meaning of “employment” for the purposes of UK tax law? If UK tax law does not provide a complete answer then the second question is: what does “employment” mean under the general law of the UK?


For the purposes of UK taxation, section 4 of the Income Tax (Earnings and Pensions) Act 2003 (“the 2003 Act”) contains a partial definition of “employment”. It provides:

“'In the employment income Parts “employment” includes in particular—

(a) any employment under a contract of service,

(b) any employment under a contract of apprenticeship, and

(c) any employment in the service of the Crown.”


Since this is not an exhaustive definition, but only an inclusive one, I consider that the meaning of the word “employment” has to be supplemented, where necessary, by the meaning of that word under the general law of England and Wales. This is expressly permitted by article 3 (2) of the treaty. Although the partial definition of “employment” in the tax legislation prevails over the meaning of that word under the general law of England and Wales, where the definition is incomplete it is permissible to resort to other laws of the contracting state. For the purposes of the preliminary issue we must, I think, assume that Mr Fowler carried out his diving activities under a contract of service. On that assumption, his activities fell within the express definition of “employment”.


Section 6 (5) of the 2003 Act provides:

“Employment income is not charged to tax under this Part if it is within the charge to tax under Part 2 of ITTOIA 2005 (trading income) by virtue of section 15 of that Act (divers and diving supervisors).”


The argument for Mr Fowler, which the FTT accepted but the UT rejected, is that the answer to the question who has the right to tax Mr Fowler's diving income is to be found in section 15 of the Income Tax (Trading and Other Income) Act 2005 (“the 2005 Act”).


Section 15 provides:

“(1) This section applies if—

(a) a person performs the duties of employment as a diver or diving supervisor in the United Kingdom or in any area designated by Order in Council under section 1(7) of the Continental Shelf Act 1964 (c.29),

(b) the duties consist wholly or mainly of seabed diving activities, and

(c) any employment income from the employment would otherwise be chargeable to tax under Part 2 of ITEPA 2003.

(2) The performance of the duties of employment is instead treated for income tax purposes as the carrying on of a trade in the United Kingdom.

(3) For the purposes of this section the following are seabed diving activities—

(a) taking part as a diver in diving operations concerned with the exploration or exploitation of the seabed, its subsoil and their natural resources, and

(b) acting as a diving supervisor in relation to any such diving operations.”


Judge Brannan put the point succinctly in the FTT at [95]:

“The question that often arises in respect of deeming provisions is how far does the effect of the deemed treatment extend? Does it only extend to the immediate purpose addressed by the provision or does it go further? That, essentially, is the question in this case. Does s 15 ITTOIA simply have the effect that Mr Fowler must compute his income in accordance with the rules relating to trading income or does the treatment deemed by s 15 mean that his income falls within art 7 rather than art 14 of the Treaty?”


Mr Schwarz, on Mr Fowler's behalf, argues that because UK tax law treats Mr Fowler's earnings from his diving activities as the carrying on of a trade within the UK, that income falls within the scope of article 7 of the treaty. Thus South Africa, and not the UK, has the right to tax that income. The statutory instruction that the performance of so much of Mr Fowler's duties...

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3 cases
  • Green
    • United Kingdom
    • First Tier Tribunal (Tax Chamber)
    • 17 June 2019
    ...of s. 15 was the individual “performing the duties of the employment”. It was the FTT's view that the Court of Appeal decision in Fowler [2018] BTC 41 did not suggest that s. 15 should be interpreted as meaning that an actual trade, which may be carried on by persons other than the diver, w......
  • Szymusik
    • United Kingdom
    • First Tier Tribunal (Tax Chamber)
    • 30 March 2020
    ...indicate that section 6(5) has priority. [50] Mr Simpson also referred me to the decision of the Court of Appeal in Fowler v R & C Commrs [2018] BTC 41. In that case the Court of Appeal held that the effect of the deeming required by section 15 meant that for the purposes of the double tax ......
  • Puttnam
    • United Kingdom
    • First Tier Tribunal (Tax Chamber)
    • 17 June 2019
    ...of s. 15 was the individual “performing the duties of the employment”. It was the FTT's view that the Court of Appeal decision in Fowler [2018] BTC 41 did not suggest that s. 15 should be interpreted as meaning that an actual trade, which may be carried on by persons other than the diver, w......

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