Background
Knights Developments Limited, an Isle of Man tax-resident company in the Dandara group, carried on a trade of acquiring, developing and selling UK land. It acquired land at Knights Wood in Tunbridge Wells, treated it as trading stock, commissioned a related company to construct homes there and sold the completed properties. Strategic decisions were made in the Isle of Man, and HMRC accepted that Knights Developments had no UK permanent establishment.
The company reported trading profits for accounting periods ending between June 2017 and June 2021 but claimed that the UK–Isle of Man double-tax arrangements made those profits taxable only in the Isle of Man. HMRC issued closure notices imposing approximately £5.4 million in additional corporation tax. The First-tier Tribunal transferred the appeals to the Upper Tribunal for determination, and Knights Developments’ case served as the lead appeal for related companies raising materially similar issues.
The Court’s Holding
The Upper Tribunal dismissed the appeal and upheld the closure notices. It held that the development and sale profits were “income derived from immovable property” under paragraph 3A of the amended 1955 arrangements and Article 6 of the 2018 agreement. Article 6 was not confined to rent or other income generated while property remained in the owner’s hands. The profits had a direct and substantial connection with the UK land, and Article 6 therefore permitted the United Kingdom to tax them despite the absence of a UK permanent establishment.
The Tribunal also concluded that Article 6(3), referring to direct use, letting or use in any other form, was clarificatory rather than an exhaustive restriction on Article 6(1). It added that, even if Article 6(3) imposed the relevant limit, developing the land constituted use of it. Addressing HMRC’s alternative argument on an obiter basis, the Tribunal held that Article 13 concerned capital gains and did not extend to these agreed trading profits merely because they arose upon disposals.
Key Takeaways
- Trading profits from acquiring, developing and selling UK land can constitute income derived from immovable property under Article 6 of the UK–Isle of Man arrangements.
- The source state’s Article 6 taxing right can apply to an enterprise even when it has no permanent establishment in that state.
- Article 13’s reference to gains concerns the treaty category of capital gains, not income trading profits merely realised through a sale.
Why It Matters
The decision confirms that an offshore property developer cannot necessarily rely on the business-profits article and the absence of a UK permanent establishment to prevent UK taxation. Article 6 may independently allocate taxing rights to the United Kingdom when profits are sufficiently connected to UK land.
The ruling also affects stayed appeals involving related companies and potentially other non-resident developers. HMRC estimated that the broader issue implicated possible historic refund claims of up to £1 billion and prospective annual revenue of up to £230 million.