The Supreme Court has decided on a case regarding the UK / South Africa tax treaty, finding for HMRC that application of certain UK tax rules would cause an anomalous result when interpreting a tax treaty.  The case centred around a South African resident individual who had diving engagements in the UK and its continental shelf.

Under domestic UK legislation the income an individual earns from diving engagements is always taxed as self-employed income irrespective of the contract that the individual has with the employer or contracting counterparty.  This legislation operates independently of any tax treaty the UK may have with another country and was originally enacted in the 1970s to allow seabed divers, who commonly paid for their own expenses, to access the more generous tax expense deduction regime available to those self-employed.

The SC found that this legislation should not be used to interpret the UK / South Africa tax treaty.  The question of whether the taxpayer was an employee or earning business profits (which would only be taxed in South Africa) is a question of fact and where the individual was determined to be employed under a contract of service then income from that contract should be taxed as employment income in the UK in accordance with the terms of the treaty.  The fact that the UK has separate deeming provisions under its domestic legislation has no bearing on how the treaty operates as the deeming provision creates a statutory fiction that the courts are required to uphold but this statutory fiction does not apply to tax treaties.

The income that the diver earnt under the UK diving engagements was taxable in the UK as employment income.  The diver can then arrange for this treaty defined employment income to be deemed as self-employment income under domestic UK legislation so he may also access the more generous tax expense deduction regime.  Where it is found as a question of fact that the diving engagements were not income from an employment contract then the business profits section of the treaty would be in point and the income could be earned free of UK tax.

The decision can be found at: Fowler (Respondent) v Commissioners for Her Majesty’s Revenue and Customs (Appellant) – The Supreme Court

International tax matters can be very complicated as the above case highlights.  Please contact us if you have any questions with international assignments or transactions that you may be considering.