Income tax deeming provision does not extend to the interpretation of double tax treaty
Our pick of this week's cases
In Fowler v HMRC[2020] UKSC 22 (20 May) the Supreme Court, by a unanimous judgment, ruled that the deeming provision in ITTOIA 2005 s 15, which treats the performance of duties of employment as a diver as trading in the UK for income tax purposes, does not extend to the question of which article of the South Africa/UK double tax treaty (DTT) applies to those activities. The result is that they are taxable in the UK in accordance with article 14 (Income from Employment) and not article 7 (business profits). The court overturned the decision of the Court of Appeal.
Mr Fowler was a South African resident diver who undertook diving work on the UK continental shelf. The dispute arose around how his diving income should be treated under the DTT between the UK and South Africa (the Double Taxation Relief (Taxes on Income) (South Africa) Order, SI 2002/3138.
HMRC argued that this diving activity fell within article 14 of the DTT as income from employment, which would result in it being chargeable to UK income tax.
Mr Fowler argued that ITTOIA 2005 s 15, which deems divers employed on the UK continental shelf to be treated as if they were self-employed, should result in his diving income being treated as business profits under article 7 of the DTT (and therefore not taxable in the UK).
Having set out the principles for interpreting DTTs (endorsing long standing approaches such as those set out in Smallwood) and highlighting the importance of article 3(2) of the DTT (the interpretation provision), the Supreme Court considered the way in which the deeming provision in s 15 should be approached. It considered that there is nothing in the DTT itself that requires Articles 7 and 14 to be applied to the deemed rather than real world, unless the effect of article 3(2) is that a deeming provision alters the meaning which relevant terms of the treaty would otherwise have. Lord Briggs concluded that this is not how a deeming provision works: s 15 uses the terms ‘employment’, ‘employment income’ and ‘trade’ in the same sense as elsewhere in the income tax provisions; it does not alter their meaning, but rather re-quires the income to be taxed, contrary to the fact that it is in fact employment income, as if it were profits of a trade.
The court identified that the purpose of the deeming provision is not to render a qualifying diver immune from UK tax, nor to allocate taxing rights between states, but rather to adjust the basis of a continuing UK income tax liability which arises from the receipt of employment income. Therefore, to allow the deeming provision to alter the definitions of terms under the DTT would be contrary to the purpose of the provision and would produce an anomalous result.
Why it matters: This case is of much wider interest than just divers due to its guidance on domestic deeming provisions in the context of DTTs. While the Supreme Court did not set down and hard and fast principles for dealing with deeming provisions, it is moderately clear that for a deeming provision to affect the definition of a term used within a DTT (but not defined there), there would have to be something within the deeming provision itself that altered the term, rather than creating a fiction to sit above the term. It seems unlikely that many of the UK’s deeming provisions, if any, would extend far enough to alter the meaning of a term for the purposes of interpreting a DTT.
Income tax deeming provision does not extend to the interpretation of double tax treaty
Our pick of this week's cases
In Fowler v HMRC[2020] UKSC 22 (20 May) the Supreme Court, by a unanimous judgment, ruled that the deeming provision in ITTOIA 2005 s 15, which treats the performance of duties of employment as a diver as trading in the UK for income tax purposes, does not extend to the question of which article of the South Africa/UK double tax treaty (DTT) applies to those activities. The result is that they are taxable in the UK in accordance with article 14 (Income from Employment) and not article 7 (business profits). The court overturned the decision of the Court of Appeal.
Mr Fowler was a South African resident diver who undertook diving work on the UK continental shelf. The dispute arose around how his diving income should be treated under the DTT between the UK and South Africa (the Double Taxation Relief (Taxes on Income) (South Africa) Order, SI 2002/3138.
HMRC argued that this diving activity fell within article 14 of the DTT as income from employment, which would result in it being chargeable to UK income tax.
Mr Fowler argued that ITTOIA 2005 s 15, which deems divers employed on the UK continental shelf to be treated as if they were self-employed, should result in his diving income being treated as business profits under article 7 of the DTT (and therefore not taxable in the UK).
Having set out the principles for interpreting DTTs (endorsing long standing approaches such as those set out in Smallwood) and highlighting the importance of article 3(2) of the DTT (the interpretation provision), the Supreme Court considered the way in which the deeming provision in s 15 should be approached. It considered that there is nothing in the DTT itself that requires Articles 7 and 14 to be applied to the deemed rather than real world, unless the effect of article 3(2) is that a deeming provision alters the meaning which relevant terms of the treaty would otherwise have. Lord Briggs concluded that this is not how a deeming provision works: s 15 uses the terms ‘employment’, ‘employment income’ and ‘trade’ in the same sense as elsewhere in the income tax provisions; it does not alter their meaning, but rather re-quires the income to be taxed, contrary to the fact that it is in fact employment income, as if it were profits of a trade.
The court identified that the purpose of the deeming provision is not to render a qualifying diver immune from UK tax, nor to allocate taxing rights between states, but rather to adjust the basis of a continuing UK income tax liability which arises from the receipt of employment income. Therefore, to allow the deeming provision to alter the definitions of terms under the DTT would be contrary to the purpose of the provision and would produce an anomalous result.
Why it matters: This case is of much wider interest than just divers due to its guidance on domestic deeming provisions in the context of DTTs. While the Supreme Court did not set down and hard and fast principles for dealing with deeming provisions, it is moderately clear that for a deeming provision to affect the definition of a term used within a DTT (but not defined there), there would have to be something within the deeming provision itself that altered the term, rather than creating a fiction to sit above the term. It seems unlikely that many of the UK’s deeming provisions, if any, would extend far enough to alter the meaning of a term for the purposes of interpreting a DTT.
