Knights Developments v HMRC: Upper Tribunal rules Isle of Man developer's UK land profits taxable under double tax treaty

The Upper Tribunal (Tax and Chancery Chamber) has dismissed an appeal by Knights Developments Limited against HMRC closure notices seeking additional corporation tax of around £5.4 million, in a judgement with significant implications for offshore property developers operating in the United Kingdom.

KDL, an Isle of Man resident company within the Dandara group founded by Daniel Tynan, carried on a trade of acquiring, developing and selling land in the UK, including a development at Knights Wood in Tunbridge Wells, Kent, acquired in 2010 for £9 million. It was common ground that KDL's profits were trading profits, and income in nature, and that the company had no UK permanent establishment. The dispute turned entirely on whether the double taxation arrangements between the UK and the Isle of Man allocated taxing rights over those profits to the UK.

HMRC argued the profits fell within Article 6 of the 2018 UK-Isle of Man agreement, covering "income derived from immovable property", or alternatively Article 13, covering "gains derived from the alienation of immovable property". KDL contended neither provision applied, meaning the profits would be taxable only in the Isle of Man under Article 7's business profits rule, given the absence of a UK permanent establishment.

Mr Justice Thompsell and Judge Raghavan sided with HMRC on Article 6. The Tribunal held that the general words of Article 6(1) are broad and unqualified, and that Article 6(3), which refers to income from "direct use, letting, or use in any other form" of property, operates as a clarificatory provision rather than an exhaustive definition limiting Article 6(1) to income from continuing use or exploitation. The Tribunal rejected KDL's submission, supported by academic commentary from Vogel and Baker and by the Court of Appeal and Supreme Court reasoning in Royal Bank of Canada v HMRC, that Article 6 draws a firm distinction between income from use and income from alienation. It found that Royal Bank of Canada addressed a different question, namely whether contractual rights had a sufficient proprietary connection to immovable property to engage Article 6 at all, rather than whether an owner's disposal profits fall outside the Article.

The Tribunal gave weight to the wider context of the 2016 protocol introducing these provisions, including Isle of Man Treasury statements describing the changes as closing a perceived loophole affecting non-resident developers, while cautioning that such material could not itself determine the treaty's meaning.

Had it been necessary to decide the point, the Tribunal indicated it would also have found KDL's activities fell within the narrower reading of Article 6(3), since an integrated development trade involving planning, construction and marketing constitutes a "use" of land beyond the final act of sale.

On Article 13, considered obiter given the Article 6 finding, the Tribunal reached the opposite conclusion to HMRC's alternative case, holding that the article is confined to capital gains and does not extend to trading profits realised on disposal. This followed from Article 7(4)'s distinction between income and capital gains and from the Supreme Court's treatment of Article 13 in Royal Bank of Canada.

The case was treated as the lead appeal for a group of related companies, with HMRC estimating potential historic refund claims of up to £1 billion and future annual revenue effects of up to £230 million connected to the wider issue.