UK and International Tax news

Upper Tribunal Dismisses Appeal in DTA Taxing Rights Case

Wednesday 16th September 2026

The Upper Tribunal has recently heard the taxpayer’s appeal in a case involving taxing rights on income from immovable property under Article 6 of the UK – Isle of Man double tax agreement.

In Knights Developments Ltd v HMRC [2026 UKUT 00329], the appeal concerned an IOM resident company [KDL] and profits realised from the acquisition, development and sale of land in the UK. The parties agreed that, during the relevant periods KDL, carried on a trade of dealing in and developing UK land, and its profits were trading profits and were revenue or income rather than capital in nature under UK tax law.

As HMRC did not contest the appellant’s case that it did not have a permanent establishment in the UK, the only issue in the appeal concerned the allocation of taxing rights. HMRC maintained the profits fell within the treaty provisions dealing with income from immovable property under Article 6 or gains from the alienation of immovable property under Article 13. KDL maintained they fell within neither provision and, in the absence of having a UK permanent establishment, were taxable only in the IOM.

KDL’s position was that the trading profits in issue being income in nature did not constitute income from immovable property within Article 6 because they arose on the disposal rather than use of the land. Neither did they fall within Article 13 which was concerned with capital gains and not trading profits. On that basis, the profits fell within Article 7 (business profits) and, in the absence of a UK permanent establishment, were taxable only in the IOM.

KDL’s appeals against the closure notices issued by HMRC were initiated in the FTT and on direction transferred to the UT for determination. The additional tax at stake was £5.4m. KDL’s appeal was being treated as the lead appeal for a number of related companies within the wider KDL corporate group whose appeals raised similar issues stayed pending the determination of this case. The amounts potentially affected by the outcome of the appeals were estimated at up to £1bn and future lost revenue of up to £230m per year.

KDL maintained that Article 6 was concerned only with income derived from the use or exploitation of land, and para (3) of Article 6 exhaustively defined what was meant by “income derived” for the purposes of para (1). On that basis, profits from the sale of land, involving no continuing use or exploitation, fell outside Article 6.

That submission was said to be supported by the structure of the treaty, in particular the distinction between Articles 6 and 13, OECD’s commentary and academic writing and observations in Royal Bank of Canada, which emphasise a requirement of a continuing connection with land through its use.

HMRC submitted that the natural meaning of para (1) was wide and unqualified, and that it encompassed profits derived from dealing in land. They rejected KDL’s attempt to confine the provision to income from use, and argued that para (3) was not exhaustive but clarificatory.  Para (4) confirmed that the Article applied to income of an enterprise, including business profits derived from land.

The UT reviewed the activities of KDL.  With reference to the legal principles governing interpretation, in particular Lord Reed’s statements in Anson, and OECD Commentaries, the UT held that the profits realised by KDL fell within Article 6 and the UK was entitled to tax those profits. The closure notices for the relevant years were therefore correct, and upheld and KDL’s appeal dismissed.

 

If you would like more information on the above decision, please contact Keith Rushen on 0044 (0) 207 486 2378.

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