Test Case on Correct Tax Treatment of North Sea Divers’ Employment Income

The Upper Tribunal (Marcus Smith J) has handed down its Decision in a test case (Fowler v HMRC) concerning the correct tax treatment of an employee’s deemed self-employment income under the UK / South Africa Double Tax Convention.  

The issue arises because the UK deems employed divers’ employment income to be trading income for the purposes of income tax.  This enables the employed divers to benefit from the more favourable tax treatment enjoyed by self-employed divers.  Mr Fowler was a South African resident who was employed in the UK as a professional off-shore diver.  The question the UT had to decide was which of the employment or business profits articles in the DTC applied to allocate taxing rights in respect of the income he received in respect of the services he performed in the UK.  If it was the business profits article the UK would not have taxing rights because Mr Fowler did not have a permanent establishment in the UK; if the employment article applied then the UK would be permitted to tax the income earned in the UK.   Mr Fowler contended that because his income was deemed to be and taxed as trading income the trading / business profits article applied.  HMRC argued that the employment article applied because the income was derived from services performed in the UK under a contract of employment and the DTC was concerned with the character of the relationship (employed or self-employed) and not how the income was taxed.

The Upper Tribunal accepted HMRC’s argument and held that the employment article of the DTC applied to allocate taxing rights.  This case is potentially of wide-ranging significance for non-resident off-shore divers who are employed on short term contracts in the UK.  The Decision can be accessed here

Akash Nawbatt QC represented HMRC.

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