HMRC wins tax treaty case against S. African diver

UK tax authority HMRC has won the right to tax the earnings of a South African resident who undertook diving work on the UK continental shelf.

The case involved Martin Fowler, a South African resident, and professional diver, who undertook diving engagements in the UK Continental Shelf waters.

HMRC had claimed that the income he earned while on the diving assignments would be subject to UK tax.

By contrast, Fowler insisted the income should be exempt from UK income tax, as Britain and South Africa have a double-taxation treaty (also known as a double-taxation agreement, or DTA)

The DTA between the two countries ensures employment income is taxed by the state where it is earned, yet self-employed and freelance workers are taxed where they are resident. Fowler's case appeared to bridge these two, as the income was earned in the UK, yet he was resident in South Africa.

Fowler claimed that for the purposes of interpreting the DTA, he should be viewed as self-employed. However, the London Supreme Court decided the South African authorities would be considered an employee by the tax authorities, and would therefore avoid paying any income tax altogether.

Lord Briggs, who delivered the judgment of the Supreme Court last week, said: "Nothing in the Treaty requires articles 7 [the business profits article] and 14 [the employment income article] to be applied to the fictional, deemed world which may be created by UK income tax legislation." 

"If one asks, as is required, for what purposes and between whom is the fiction [that employed divers are self employed] created, it is plainly not for the purpose of rendering a qualifying diver immune from tax in the UK, nor adjudicating between the UK and South Africa as the potential recipient of tax."

"It is for the purpose of adjusting the basis of a continuing UK income tax liability which arises from the receipt of employment income. Therefore to apply the deeming provision … so as to alter the meaning of terms in the Treaty with the result of rendering a qualifying diver immune from UK taxation would be contrary to its purpose. It would also produce an anomalous result."

Jake Landman, a tax disputes expert at law firm Pinsent Masons, said: "The decision is useful in terms of clarifying how terms will be interpreted in a double tax treaty and confirms that when a fiction is created under one of the signatory's tax codes this will sometimes be disregarded so as not to lead to a result which appears contrary to the purpose of the treaty."

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