Judgment summary
This appeal concerned the allocation of taxing rights between the United Kingdom and the Isle of Man over profits made by Knights Developments Limited ("KDL"), an Isle of Man resident company, from acquiring, developing and selling land at Knights Wood, Tunbridge Wells (paras 1, 10).
It was common ground that KDL's profits were trading profits, income in nature under UK domestic law, and that KDL had no UK permanent establishment (paras 9, 22-23). HMRC argued the profits fell within Article 6 (income from immovable property) or, alternatively, Article 13 (gains from alienation of immovable property) of the 2018 UK/Isle of Man Agreement and the corresponding paragraphs 3A and 3B of the 1955 Agreement as amended in 2016. KDL argued the profits fell within neither provision and, absent a UK permanent establishment, were taxable only in the Isle of Man under Article 7 (paras 42-44).
The Upper Tribunal held that Article 6(1) is broad and unqualified, and is not limited by Article 6(3) to income from continuing use or exploitation of property; it extends to profits realised on disposal of land developed by the owner (paras 62-88, 137-139). The Tribunal therefore held that KDL's profits fell within Article 6, and the appeal was dismissed on that basis (paras 137, 178-179).
On an obiter basis, the Tribunal considered Article 13 and concluded that it is concerned only with gains of a capital nature, not trading profits realised on disposal, having regard to Article 7(4), the structure of the arrangements and the reasoning in Royal Bank of Canada v HMRC (paras 158-177).
Background
KDL was incorporated in the Isle of Man on 27 November 2001 and has at all material times been resident there for tax purposes, never in the United Kingdom (para 5). It was a member of the Dandara group of companies, founded by Mr Daniel Tynan, an Irish national resident and domiciled in the Isle of Man since 1986/1987 (paras 6-8).
KDL carried on a trade of dealing in and developing UK land, a matter agreed between the parties, and its profits were agreed to be trading profits, revenue in nature rather than capital, under UK tax law (para 9). The dispute concerned land at Knights Wood (also called Knights Park), Tunbridge Wells, Kent, which KDL agreed to acquire from Kilmartin Properties (TW) Limited on 12 March 2010 for £9 million exclusive of VAT (para 10).
KDL did not itself construct on the site; it engaged Dandara Limited, a group company operating in the UK through permanent establishments, under design and build contracts, and later a marketing/agency agreement dated 6 May 2014 (paras 12-15). Strategic decisions on acquisition, development and sales were taken by KDL in the Isle of Man (paras 16-17).
For accounting periods ending 30 June 2017 to 30 June 2021, KDL returned profits ranging from £2,126,996 to £12,286,921 but claimed exemption from UK tax under the UK/Isle of Man arrangements (para 20). HMRC issued closure notices on 28 July 2022 (periods to 30 June 2020) and 1 September 2022 (period to 30 June 2021), assessing additional corporation tax totalling approximately £5.4 million across the years (paras 2, 21). KDL's appeal was treated as the lead case for related group companies, with HMRC estimating possible historic refund claims of up to £1bn and future annual lost revenue of up to £230m if KDL succeeded (para 2).
Core dispute
The dispute was whether KDL's UK trading profits, agreed to be income in nature, fell within Article 6 ("income from immovable property") of the 2018 UK/Isle of Man Agreement (and the equivalent paragraph 3A introduced by the 2016 Protocol to the 1955 Agreement), which would allow the UK to tax them (paras 1, 42).
KDL argued that Article 6 is confined, by Article 6(3), to income from the use or exploitation of land, and does not extend to profits realised on alienation of land; accordingly the profits fell within Article 7 (business profits) and, absent a UK permanent establishment, were taxable only in the Isle of Man (paras 43, 50).
HMRC argued, alternatively, that if Article 6 did not apply, the profits fell within Article 13 ("gains derived from the alienation of immovable property"), on the basis that the word "gains" in that Article was not confined to gains of a capital nature (paras 44, 151-156).
The parties agreed that the interpretative framework was that applicable to double taxation treaties generally, including Articles 31 and 32 of the Vienna Convention on the Law of Treaties, notwithstanding the Isle of Man's status as a Crown Dependency rather than a sovereign state (paras 45-48).
Court findings
The Tribunal held that Article 6(1) is expressed in broad, unqualified terms and is capable, on ordinary language, of encompassing profits derived from the ownership, development and sale of immovable property, not only income from its continuing use (paras 62-63, 138).
The Tribunal rejected KDL's submission that Article 6(3) exhaustively defines the income falling within Article 6(1); paragraph 3 was found to perform a clarificatory rather than a restrictive function, and paragraph 4 was found to confirm the independent operation of paragraph 1 (paras 67-88).
The Tribunal considered the OECD Commentary, the reservations of Canada and Latvia, academic commentary (Vogel and Baker), and the decision in Royal Bank of Canada v HMRC, and found none of these materials compelled a narrower "use versus alienation" construction of Article 6 (paras 90-121, 137-138).
Having found the profits fell within Article 6(1), the Tribunal found it unnecessary to decide the scope of Article 6(3), but indicated obiter that, had it been necessary, KDL's development activities would in any event have constituted "use" of the property within Article 6(3) (paras 137, 140-148).
On Article 13, also considered obiter, the Tribunal held that, read in the context of the arrangements as a whole (including Article 7(4) and the reasoning in Royal Bank of Canada), Article 13 is concerned with gains of a capital nature and does not extend to trading profits merely because they arise on disposal (paras 158-177).
Outcome
The Upper Tribunal concluded that KDL's profits fell within Article 6 of the arrangements between the United Kingdom and the Isle of Man, so that the United Kingdom was entitled to tax them (para 178).
The closure notices for the relevant accounting periods, assessing additional corporation tax of £924,946.80, £1,244,964.36, £511,495.96, £404,129.24 and £2,334,514.99 respectively, were upheld (paras 21, 178).
KDL's appeal was dismissed (para 179).
Major issues / areas of contention
- Whether Article 6 of the UK/Isle of Man double taxation arrangements, dealing with income from immovable property, is limited by Article 6(3) to income derived from the use or exploitation of land, excluding profits realised on alienation.
- Whether Article 6(1) has independent, broad scope beyond the specific applications identified in Article 6(3) and (4).
- The relevance and weight of the OECD Commentary, OECD reservations (Canada and Latvia), and academic commentary (Vogel, Baker) to the interpretation of Article 6.
- The relevance of the Court of Appeal and Supreme Court decisions in Royal Bank of Canada v HMRC to the meaning of Article 6 and Article 13.
- Whether, alternatively, the profits fell within Article 13 (gains from alienation of immovable property), and whether the word 'gains' in that Article is confined to capital gains.
- The effect of Article 3(2) of the 2018 Agreement, directing that undefined treaty terms take their domestic law meaning unless context otherwise requires, on the meaning of 'gains' in Article 13.
- The weight to be given to contextual materials surrounding the 2016 Protocol and 2018 Agreement, including UK and Isle of Man explanatory materials, in construing the treaty.
- Whether the interpretative principles applicable to bilateral double taxation treaties between sovereign states apply equally to arrangements between the United Kingdom and the Isle of Man as a Crown Dependency.