In Fowler v HMRC [2018] EWCA Civ 2544 (15 November 2018), the Court of Appeal (one judge dissenting) found that under ITTOIA 2005 s 15, the income of a deep-sea diver was taxable as trade income (even though he was employed).
Mr Fowler was a qualified diver, resident in South Africa, who had undertaken diving engagements in UK continental shelf waters. The issue was which country (South Africa or the UK) was entitled to levy tax on Mr Fowler’s income from his diving activities, applying the UK/South Africa double tax treaty. The two competing articles of the treaty were art 7 (business profits) and art 14 (employment).
It was common ground that if Mr Fowler was self-employed, he was taxable in South Africa. The court noted that ‘employment’ is not defined in the treaty, which provides that any undefined term shall have the meaning it has under the relevant national law. So, UK law applied when deciding whether Mr Fowler was employed. ITTOIA 2005 s 15 treats employment income from diving activities as trade income. Mr Fowler therefore contended that the income from his diving activities should be treated as trading profits, falling with art 7 of the treaty.
Henderson LJ and Baker LJ found that the relevant duties of Mr Fowler’s actual employment should be treated, for income tax purposes, as the carrying on of a trade in the UK. ‘Accordingly, in the imaginary world which we have to enter, the actual earnings of Mr Fowler from his employment must instead be regarded as profits of the trade which he is now deemed to have carried on.’ They noted that it was not just a question of how Mr Fowler’s employment income was to be taxed; it was the substitution of one (notional) source of taxable income for another (actual, but disregarded) source.
Lewison LJ dissented, finding that the purpose of s 15 is merely to describe the manner in which Mr Fowler’s employment income is to be taxed. He added that the manner in which employment income of a specified description is taxed does not change its basic legal characteristics so that, even if Mr Fowler’s income was taxable under s 15 in the UK, it was still employment income for the purposes of the treaty.
Why it matters: The FTT’s decision, in favour of Mr Fowler, was reversed by the UT and the decision of the Court of Appeal was not unanimous. The extent of the deeming effect of ITTOIA 2005 s 15(2) may not be settled. The generic question for any deeming provision remains: 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? (Judge Brannan in the FTT [2016] UKFTT 338).
In Fowler v HMRC [2018] EWCA Civ 2544 (15 November 2018), the Court of Appeal (one judge dissenting) found that under ITTOIA 2005 s 15, the income of a deep-sea diver was taxable as trade income (even though he was employed).
Mr Fowler was a qualified diver, resident in South Africa, who had undertaken diving engagements in UK continental shelf waters. The issue was which country (South Africa or the UK) was entitled to levy tax on Mr Fowler’s income from his diving activities, applying the UK/South Africa double tax treaty. The two competing articles of the treaty were art 7 (business profits) and art 14 (employment).
It was common ground that if Mr Fowler was self-employed, he was taxable in South Africa. The court noted that ‘employment’ is not defined in the treaty, which provides that any undefined term shall have the meaning it has under the relevant national law. So, UK law applied when deciding whether Mr Fowler was employed. ITTOIA 2005 s 15 treats employment income from diving activities as trade income. Mr Fowler therefore contended that the income from his diving activities should be treated as trading profits, falling with art 7 of the treaty.
Henderson LJ and Baker LJ found that the relevant duties of Mr Fowler’s actual employment should be treated, for income tax purposes, as the carrying on of a trade in the UK. ‘Accordingly, in the imaginary world which we have to enter, the actual earnings of Mr Fowler from his employment must instead be regarded as profits of the trade which he is now deemed to have carried on.’ They noted that it was not just a question of how Mr Fowler’s employment income was to be taxed; it was the substitution of one (notional) source of taxable income for another (actual, but disregarded) source.
Lewison LJ dissented, finding that the purpose of s 15 is merely to describe the manner in which Mr Fowler’s employment income is to be taxed. He added that the manner in which employment income of a specified description is taxed does not change its basic legal characteristics so that, even if Mr Fowler’s income was taxable under s 15 in the UK, it was still employment income for the purposes of the treaty.
Why it matters: The FTT’s decision, in favour of Mr Fowler, was reversed by the UT and the decision of the Court of Appeal was not unanimous. The extent of the deeming effect of ITTOIA 2005 s 15(2) may not be settled. The generic question for any deeming provision remains: 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? (Judge Brannan in the FTT [2016] UKFTT 338).
