Revenue and Customs Commissioners v Fowler
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 May 2017 |
| Neutral Citation | [2017] UKUT 219 (TCC) |
| Date | 30 May 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0219 (TCC)
The Honourable Mr. Justice Marcus Smith
Upper Tribunal (Tax and Chancery Chamber)
Income tax – Interpretation of Double Tax Treaty – ITTOIA 2005, s. 15 – Performance of duties of employed diver in UK waters treated as the carrying on of a trade in the UK – Whether governed by art. 14 (employment income) or art. 7 (business profits) of South Africa/UK Double Tax Treaty 2002.
The Upper Tribunal (UT) allowed HMRC's appeal. Although UK tax law treated the performance of the duties of an employed diver in UK waters as the carrying on of a UK trade, this did not cause the case to fall under the “business profits” article of the UK/South Africa Double Tax Treaty; for the purposes of determining taxing rights under the Treaty, the applicable article remained art. 14, the “employment income” article.
The taxpayer (F), resident in South Africa, worked as a qualified diver in the UK Continental Shelf sector during the two tax years ending 5 April 2013. HMRC decided F's income from his diving activities fell within art. 14 (Income from Employment) of the UK/South Africa Double Tax Treaty (the Treaty) and was, therefore, chargeable to UK income tax.
The question whether F was for the relevant tax years an employee (as HMRC contended) or was self-employed (as F contended) was in dispute. But even if F was an employee for the relevant tax years, ITTOIA 2005, s. 15 treated the performance of the duties of his employment for income tax purposes as the carrying on of a trade. The issue before the First-tier Tribunal (FTT), which was a preliminary issue, had been whether, on the assumption F was employed, the effect of s. 15 meant that he could not be liable to income tax in the UK, by reason of art. 7 (Business profits) of the Treaty, or whether he remained liable by reason of art. 14 notwithstanding the effect of s. 15.
F's case was that art. 3(2) of the Treaty required any term not defined in the Treaty to take its meaning from domestic law. The meaning of “trade” in ITTOIA 2005, s. 5 extended to activities treated as trades, such as under s. 15. Thus, the trade a diver was deemed to carry on by s. 15 constituted the carrying on of a business within art. 3(1)(g) and gave rise to business profits within art. 7. Furthermore, income within s. 15 was taken out of the charge to employment income by ITEPA 2003, s. 6(5).
HMRC's case was that the purpose of art. 14 was to allocate taxation rights between the state of residence (South Africa) and the place where the employment was exercised (the UK). The role of art. 14 was simply to determine which contracting state had the right to tax the income. Art. 14 was not concerned with how the contracting state taxed the income.
HMRC had also argued, before the FTT, that the OECD Commentary supported their submissions. In particular, the following, added to the Commentary in 2010:
… a state could not argue that services are deemed, under its domestic law, to constitute employment services where, under the relevant facts and circumstances, it clearly appears that the services are rendered under a contract for the provision of services concluded between two separate enterprises.
In the FTT, the judge had said art. 3(2) indicated a mandatory requirement to apply domestic law in the case of undefined terms, unless the context otherwise required. He considered the UK tax provisions which corresponded to “the profits of an enterprise” within art. 7 (business profits), were intended to apply to the charge to tax on the “profits of a trade, profession or vocation” within the meaning of ITTOIA 2005, s. 5, including profits arising from the deemed trade in s. 15. It was the clear purpose of s. 15 to re-characterise what would otherwise be the exercise of employment duties as the carrying on of a trade. Further, s. 15 provided that the performance of the duties of F's employment was to be treated “for income tax purposes” as the carrying on of a UK trade. The words “for income tax purposes” would include TIOPA 2010, s. 6 which provided that “double taxation arrangements have effect in relation to income tax … so far as the arrangements provide …”. The judge considered, therefore, that s. 15 must have effect in relation to the Treaty.
Moreover, ITEPA 2003, s. 6(5) excluded income from the charge to tax on employment income if it fell within ITTOIA 2005, s. 15. This meant that, under the provisions of UK tax law which corresponded to art. 14, F's income was not employment income and could not fall within art. 14.
HMRC had raised the objection that to allow a state to rely on a deemed domestic meaning would allow it unilaterally to change its law to expand its taxing rights under a Treaty. The judge in the FTT did not agree. If a contracting state changed its domestic law after the conclusion of a double tax treaty in such a way as to reallocate income from one article to another – in other words, to change the effect of the distributive rules of a treaty with respect to the particular type of income – that could contravene the requirements of good faith imposed by art. 31(1) of the Vienna Convention and by international law generally. Here the provision of domestic law which re-characterised the type of income was one which was already in existence at the date the relevant treaty was concluded.
In his view too, the passages in the OECD Commentary were introduced in 2010, eight years after the Treaty was concluded in 2002, and could therefore only have limited value in interpreting the Treaty.
For these reasons, the FTT had decided the preliminary point in favour of F. By virtue of s. 15 when read with art. 3(2) of the Treaty, F's income from diving activities in the UK or UK Continental Shelf for the years in question fell within art. 7 of the Treaty.
The judge in the UT said the term defining the scope of art. 14 was the term “employment” (i.e. the status) rather than the “salaries, wages and other similar remuneration derived … in respect of” it (i.e. the fruits of that status). When considering the taxing rights as between the two contracting states, it was “employment” that was determinative. That term, used in art. 14, was not specifically defined. In consequence resort to English law must be had to construe the term “employment”, which was found in ITEPA 2003, s. 4(1); and it was not necessary to consider the term “employment income” in s. 7 in order to understand the term “employment”.
It followed that ITTOIA 2005, s. 15 was not relevant to the definition of “employment” because it related not to that definition, but to the definition of “employment income”, which was irrelevant for the purpose of construing the term “employment” in art. 14.
The judge said it was necessary to check the soundness of this conclusion against the result from looking at the application of art. 7. But in this respect there was no overlap between art. 7 and art. 14, and so no inconsistency surrounding the conclusion under art. 14. Art. 7 related to contracts for services and art. 14 to contracts of employment or service. As in the case of art. 14, with the distinction between “employment” and “employment income”, it was the term “enterprise” that defined the scope of art. 7, and not the further term used there “profits of an enterprise”.
The judge noted finally that he had been referred to the OECD Model Tax Convention dated 15 July 2014, and a number of OECD commentaries on various articles of that (and earlier) OECD Model Tax Conventions, but did not find these materials of any assistance in this case.
Accordingly, on the assumption that F was employed and not self-employed, F's diving engagements in UK Continental Shelf waters fell within art. 14 of the Treaty.
The UT took a very different approach to the FTT in determining which article in the Treaty governed taxing rights. Its own starting point was to consider whether art. 14 applied, and for this purpose look at the taxpayer's status (as an “employee” or not), rather than at the treatment of the income in question. Although the UT said the (current) OECD commentary to which it had been referred had not provided assistance, it seems its decision (rather than the FTT's decision) is more in line with that commentary.
Akash Nawbatt, Q.C., instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Jonathan Schwarz, instructed by Norton Rose Fulbright, appeared for the respondent
[1] Mr. Fowler is a qualified diver resident in South Africa. During the 2011/2012 and 2012/2013 tax years, he undertook diving engagements in the UK Continental Shelf waters.
[2] Mr. Fowler is a resident of the Republic of South Africa for the purposes of the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of South Africa for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains (the “Double Tax Treaty”).
[3] The Double Tax Treaty has been incorporated into English law by the Double Taxation Relief (Taxes on Income) (South Africa) Order 2002, S.I. 2002 No. 3138.
[4] By closure notices issued by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) in respect of the relevant tax years, HMRC sought to tax Mr. Fowler's income from his diving activities on the ground that this income was from employment within article 14 of the Double Tax Treaty (“Income from Employment”) rather than business profit within article 7 of the Double Tax Treaty (“Business Profits”).
[5] It is common ground that if Mr. Fowler was self-employed in the relevant tax years, then his diving income is not taxable as he has no permanent establishment within the UK. What is not common ground is Mr. Fowler's self-employed status. Mr. Fowler contends that he was self-employed in the relevant...
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