Tax Concessions Are Interpreted Narrowly – as a Professional Diver Discovers


Professional divers who work on the UK’s seabed enjoy a uniquely advantageous status under domestic tax law in that their employment income is treated as profits from a trade. As a First-tier Tribunal (FTT) ruling made plain, however, the extent of such concessions is always subject to restrictive interpretation.

The case concerned a diver who carried out some of his work on the seabed of UK territorial waters. He was agreed to be an employee. By virtue of Section 15 of the Income Tax (Trading and Other Income) Act 2005, however, the performance of his duties of employment was instead treated for Income Tax purposes as the carrying on of a trade in the UK. That meant that he was entitled to set off a greater proportion of his equipment and other expenses against his tax bills.

During a number of tax years, he treated his UK employment income from diving as the trading income of a partnership with his spouse. In all but one of those years, he reported half of that income on his tax return as his share of the partnership’s profits. The remaining profit share appeared on his spouse’s tax return. HM Revenue and Customs (HMRC) took the view that he was not entitled to take that course and assessed him for more than £100,000 in additional tax.

In challenging that decision, the diver asserted that Section 15 entitled him to trade as a partnership. On his interpretation of the provision, it permitted the employment income of a diver to be treated as the trading income of a partnership, thereby effectively reclassifying the diver’s employment as a trade. It was the owners of such partnerships who were subject to tax, rather than the divers themselves.

Dismissing his appeal, however, the FTT preferred HMRC’s more restrictive reading of Section 15. The provision, it found, does not allow a qualifying diver’s employment income, although deemed to be trading income, to be treated as that of any other person or persons, such as a partnership. As a deeming provision, Section 15 creates a fiction for the specific purpose of providing how a diver’s income should be taxed. It was wrong to interpret it as meaning that an actual trade is created.

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