Fowler v HM Revenue and Customs

A tax deeming provision must be given its ordinary meaning and carry the inevitable consequences of the deemed state of affairs. Where section 15 of the Income Tax (Trading and Other Income) Act 2005 applies, diving duties are treated as the carrying on of a trade for all UK income-tax purposes. The resulting earnings are trading income rather than remuneration from employment. Under article 3(2) of the treaty, “employment” takes its UK tax-law meaning. Article 14 therefore does not apply, and article 7 governs the income. Specific treaty provisions take priority over the business profits article where they apply.

Mr Fowler, a South African resident and qualified diver, undertook diving engagements in UK continental-shelf waters during the 2011/2012 and 2012/2013 tax years. The parties agreed that South Africa would have taxing rights if he was self-employed. The preliminary issue was whether, assuming he was an employee, the statutory treatment of diving duties as a trade affected the allocation of taxing rights under the UK-South Africa Double Taxation Treaty.

The First-tier Tribunal decided the issue in Mr Fowler’s favour. The Upper Tribunal reversed that decision in [2017] UKUT 219 (TCC) and [2017] STC 1385. The Court of Appeal considered whether the deemed trade fell within the treaty’s business profits article rather than its employment article.

By a majority of Henderson and Baker LJJ, the appeal was allowed and the decision of the First-tier Tribunal was restored. Lewison LJ dissented.

1. The central issue was the extent of the deeming provision in section 15(2) of the Income Tax (Trading and Other Income) Act 2005. The section applies only where the statutory gateway conditions are met, including the performance of employment duties as a diver and the specified seabed-diving activities.
2. Once the section applies, the phrase “for income tax purposes” extends the fiction to all UK income-tax purposes. The relevant duties are treated as the carrying on of a trade, the earnings are treated as receipts of that trade, and the employment-income charge is displaced. Employment income and trading income are mutually exclusive for the relevant activities.
3. The majority applied the principles governing statutory fictions stated in Marshall v Kerr [1995] 1 AC 148 and reflected in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109. The inevitable consequences of the deemed state of affairs must be given effect unless excluded by the statute or inconsistent with its purpose.
4. Article 3(2) of the treaty gives an undefined term the meaning it has under UK tax law. For the relevant diving activities, the statutory fiction meant that the income was not remuneration derived in respect of employment. Article 14 was therefore inapplicable and the income fell within article 7 as profits of the deemed trade. Article 7(6) confirms that a specific article takes priority where it applies.

Lewison LJ would have dismissed the appeal. In his view, section 15 changed only the manner in which employment income was taxed and did not alter its legal character. Henderson and Baker LJJ rejected that analysis. The FTT’s decision was restored.

• Court of Appeal (Civil Division). By a majority, allowed the appeal and restored the First-tier Tribunal’s decision. Lewison LJ dissented.
• Upper Tribunal (Tax and Chancery Chamber). Marcus Smith J reversed the First-tier Tribunal’s decision: [2017] UKUT 219 (TCC); [2017] STC 1385.
• First-tier Tribunal. Judge Brannan decided the preliminary issue in Fowler’s favour; no citation is stated in the judgment.