First-tier Tribunal (Tax)

[2011] UKFTT 371 (TC)

TC01226

Appeal number:  TC/2010/04825

Double Taxation – Article 15 – OECD Commentary – Economic employer.

FIRST-TIER TRIBUNAL

TAX

MR TOMISLAV KLJUN Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL JUDGE: Mrs Anne Scott, LL.B., N.P.,

Sitting in public at Atholl House, 86-88 Guild Street, Aberdeen on Friday 8 April 2011

The Appellant did not attend

Ms C Lenaghan and Ms M Browne for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       The Hearing in this case relates to the Appellant’s appeals in regard to the amended assessments for 2006/07 and 2008/09 in respect of which Closure Notices had been issued (see paragraph 12 below).  The Closure Notices formally refused the Appellant’s claims for exemption from UK tax in terms of the relevant Double Taxation Treaty. 

2.       Despite the voluminous papers, and although the findings in fact in this case are extensive and the law relatively complicated for those not conversant with double taxation treaties, in essence, the issue is comparatively straightforward.  In summary, the Appellant is a Croatian resident who is contractually employed by a Cypriot company who deploy him to work on standby vessels in the North Sea operated by a UK resident company currently known as VOSL (see paragraph 6 below).  He is paid by BUE Cyprus Limited (hereinafter referred to as “BCL”) which complies with UK PAYE legislation.  He is not resident in the UK for tax purposes and he does not pay tax anywhere else.  For the years of assessment 2006/07 and 2008/09, which are the only years with which this Appeal is concerned, the Appellant sought to rely on Article 15 of the Double Taxation Treaty between the UK and Yugoslavia in order to reclaim the UK tax deducted under PAYE.  Those claims were rejected by the Respondents.

3.       The Appellant chose not to attend the Hearing although he lodged a bundle of papers almost all of which were included in the Bundle lodged by the Respondents.  The Respondents did not object to the lodging of these papers and had no observations to make thereon.  On 02 February 2011 the Respondents had sent to the Appellant a Schedule of matters which they believed not to be in dispute requesting his observations and to which they had not had a response.  It was lodged in the format “Statement of Facts”.  The Tribunal considered and agrees those facts and all are incorporated into the more extensive findings of the Tribunal recorded herein.  

4.       The Appellant is resident in Cavle, Croatia and is certified as resident in Croatia for taxation purposes by the Croatian authorities.  The Respondents accept that he is not resident in the United Kingdom for tax purposes.  In 2003 he was employed as a Chief Engineer by Celtic Pacific Management (Overseas) Limited and the contract of employment provided that he agreed to join, serve or transfer to any vessel manned by them and managed or owned by BUE Viking Limited.  In 2004 that employment was transferred, on the same terms, to BCL which is a Cypriot company.  The Cypriot Register of Companies records that BCL, which was incorporated in 1993, is an Industrial company and its Trade description is “nitrogenous fertilizers manufacturing”.

5.       In 2005 BUE Viking Limited changed its name to Viking Offshore Services Limited after it had became a wholly owned subsidiary of Viking Supply Ships AS in 2004 (see also paragraph 7 below).  At some date before 7 May 2007 BCL contracted with Deeside Crewing Services Ltd to act on their behalf to manage the crewing arrangements locally.  That service had previously been provided by another UK based company, namely Montrose Marine Personnel Limited.  In both instances BCL made it explicit in letters to the Appellant that the local company would make all arrangements and all queries should be directed to them.  On 7 May 2007, BCL wrote to the Appellant because it had come to their attention that the Nautilus Union (being the Union for maritime professionals) had written to their members serving on Viking Offshore Services Limited vessels in terms which implied that Viking Offshore Services Limited was the employer.  The letter from BCL to the Appellant reiterated that all queries and day to day matters would be addressed by Deeside Crewing Services Ltd and stated that “it is important to.....make sure that any employment, benefit or tax documents you complete clearly states that your employer is BUE Cyprus Ltd”.

6.       On 16 May 2007 as part of a larger sale to Vroon Group BV, and consequential group reconstruction, Viking Offshore Services Limited was renamed Vroon Offshore Services Limited (hereinafter referred to as “VOSL”). VOSL is a UK company based in Aberdeen and is a wholly owned subsidiary of Vroon Group BV.  Deeside Crewing Services Ltd is a UK company based in Aberdeen and is also a wholly owned subsidiary of Vroon Group BV.  Vroon Group BV is a Netherlands company and BCL is a 0.01% member of the Vroon Group of companies.  The sale and reconstruction involved no change to existing contractual relationships with customers, crews, employees or suppliers.

7.       The two primary contractual arrangements throughout, notwithstanding the various changes in entities and names, are firstly a Contract of employment with the Terms and Conditions of Employment (hereinafter referred to as the “Contract”) which govern the employment of crew by BCL for service in vessels owned or operated by BUE Viking Limited and secondly the Vessel Manning Agreement between BCL and BUE Viking Limited and its sister company BUE North Sea Limited (hereinafter referred to as the “Agreement”).  (Both BUE Viking Limited and BUE North Sea Limited were acquired by Viking Supply Ships AS in 2004).  Patently, when they were signed, all the parties other than the Appellant were BUE companies. 

8.       In August 2008 VOSL confirmed to the Respondents that these remained the continuing contractual arrangements.  The Press Release dated 16 May 2007 stated precisely the same.

9.       At all relevant times BCL has been the contractual employer of the Appellant.  The Appellant worked as a Chief engineer on board standby supply vessels for the oil and gas industry and specifically on board Viking, now named VOS, vessels which were deployed by VOSL and its predecessor companies (but for ease of reference hereinafter referred to as VOSL) within UK territorial waters or the UK designated area of the North Sea Continental Shelf.

10.    In terms of the Contract, the Appellant’s salary was to be paid under deduction of UK tax and National Insurance.  BCL has correctly applied PAYE to the Appellant’s earnings.  It did not appear to be a matter in contention but in terms of Sections 6(1(a)), 27, 41and 62 Income Tax (Earnings and Pensions) Act 2003 the Appellant’s earnings are taxable in the United Kingdom but, in certain circumstances, relief may be granted under a Double Taxation Convention or as it is more commonly known Double Taxation Treaty. 

11.    The Appellant submitted tax returns for 2006/07 and 2008/09 on 4 May 2007 and 25 June 2009 respectively and in both he claimed to be not resident and not ordinarily resident and he sought to reclaim UK tax deducted under PAYE.  Those claims relied on Article 15 of the Double Taxation Treaty between the UK and Yugoslavia.  Croatia is covered by the Double Taxation Treaty between the UK and Yugoslavia which was signed on 6 November 1981.  Income Tax is one of the taxes covered by the Double Taxation Treaty.

12.    Those claims were rejected by the Respondents.  Enquiries under Section 9 TMA 1970 were opened into the returns on 18 January 2008 and 5 October 2009 within the time limits set by legislation and ultimately the claims to exemption from UK income tax were formally refused by letter dated 10 February 2010 and the outstanding assessments amended.  The Appellant appealed in a letter received on 25 May 2010.  Closure Notices under section 28A (1) and (2) TMA 1970 were then issued on 23 August 2010 and included the decisions to refuse the claims to Double Taxation Relief in terms of Article 15 of the Double Taxation Convention.  The Appellant’s appeals were accepted by the Respondents as being against those Notices.  The tax computations, and the resulting amended assessments, have not been challenged by the Appellant.  The Tribunal finds that those amended assessments are correct.

13.    Accordingly, the remaining matter for the Tribunal is the question as to whether or not the Appellant is entitled to exemption from UK tax for the years 2006/07 and 2008/09 in terms of Article 15 of the Double Taxation Convention between the United Kingdom and Yugoslavia. 

14.    The Appellant’s grounds of appeal were straightforward and his stance has been consistent.  He states that he has been employed by BCL throughout, that he has had no other employer and that it is not possible to work for two employers at the same time as that would be illegal.  He avers that there is no economic employer and in particular that VOSL is not his economic employer.  The Tribunal and the Respondent agree that his contract of employment, at all times since 2004, has been with BCL which is not a UK company.

15.    The Appellant does not pay tax in Croatia.  The preamble to the Convention between the United Kingdom and Yugoslavia which was effective for Income Tax from 6 April 1983 states clearly that the Agreement has been reached “for the avoidance of double taxation with regard to taxes on income”; the objective is not to ensure that tax is paid in neither State.  That Convention remains in force between the United Kingdom and Croatia.

16.    The United Kingdom is a member of the Organisation for Economic Co-operation and Development (OECD) and this Double Taxation Convention (hereinafter referred to as the “Treaty”), is based on, but not entirely the same as, the OECD Model Tax Convention.  Croatia is not a signatory to the OECD but the Respondents averred that in their experience, Croatia like the United Kingdom seeks to apply double taxation agreements consistently with the guidance in the Commentaries on the Model Tax Convention.  The Respondents relied on that guidance in the Commentaries.  The Tribunal accepts that the Commentaries are of relevance in this case.  Although the Commentaries are not binding they are of assistance in interpreting the provisions and as far as Article 15 is concerned the Commentaries are the same for both years of assessment.  However, Article 15 of the Treaty, with which this case is concerned, is not identical to Article 15 of the Model Tax Convention.  The wording of 15(2(b)) to which the Commentaries refer is more limited than that with which this Hearing is concerned.  It reads “the remuneration is paid by or on behalf of an employer who is not a resident of the other State”, whereas the wording in the Treaty in this instance is “the remuneration is paid by, or on behalf of, a person for whose benefit, the relevant dependent personal services are rendered and who is not a resident of the other State.”

17.    The Respondents argued that Article 15 (2(b)) was effectively the same as Article 15 (2(b)) OECD Model Tax Convention and that the word employer was synonymous with person.  The Tribunal finds that “person” is capable of wider interpretation than “employer” but the test for paragraph 2(b) is essentially the same insofar as the entity which receives the economic benefit of the Appellant’s work requires to be identified and therefore the Commentaries are of assistance.  

18.    What then does Article 15 provide?  The starting point is that an individual’s remuneration would usually only be taxable in the State where that individual has residence.  However, Paragraph 1 states that wages and other similar remuneration derived from employment can be taxable in the State where the employment is actually exercised rather than the State of residence.  What does exercised mean?  The English is clear and it is where the employee is physically present when performing the activities for which the employee is being paid.  The Commentaries adopt that approach.  The term “United Kingdom” includes the UK territorial sea and Article 3 of the Treaty provides that, for the purposes of the Treaty, United Kingdom includes any area outside that territorial sea of the United Kingdom which in accordance with international law has been designated, under UK law concerning the Continental Shelf, as an area within which the rights of the United Kingdom with respect to natural resources may be exercised.  The vessel(s) on which the Appellant worked were deployed in UK territorial waters and/or in the UK designated area of the North Sea Continental Shelf.  Accordingly the Tribunal finds that the Appellant’s employment was exercised in the United Kingdom and his remuneration had the capacity to be taxed in the United Kingdom.  As indicated above it is not being taxed in Croatia and UK tax has been deducted at source.

19.    Paragraph 2 of Article 15 must then be considered.  That provides that if employment is exercised in a particular State, in this case the United Kingdom, then the remuneration can be exempt from taxation in that State if the conditions in paragraph 2(a) together with either 2(b) or 2(c) are met.  The Respondents’ contention was that 2(b), which failing 2(c), was not met.  The Tribunal considered each condition in turn in the context of the facts pertaining to the Appellant’s circumstances set out herein.

20.    The first condition, being Article 15 (2 (a)) is met since, in their oral submission, the Respondents accept that the Appellant was not present in the United Kingdom for 183 days.

21.    The second condition, being Article 15(2(b)) is that the remuneration is paid by, or on behalf of, a person for whose benefit, the relevant services are rendered and who is not a resident of, in this case the United Kingdom . Clearly BCL, which paid the remuneration, is not a UK resident company.  On the face of it that might be the end of the matter but as indicated above, it is not.  Indeed the substantive issue at the heart of these appeals is the construction of the latter part of paragraph 2(b).  It is also the context in which the concept of economic employer, to which the Appellant takes exception, arises.

22.    The Tribunal considered whether BCL was the person to whom or for whose benefit, those services are rendered.  It is a Cypriot based industrial company registered as being concerned with “nitrogenous fertilizers manufacturing” but has contractually agreed to supply crews for vessels in terms of the Agreement.  BCL subcontracted most, if not all, of their functions, as they were entitled to do, in terms of paragraph 3 of the Agreement.  Indeed, the Appellant was instructed to send his signed copy of the Contract to the subcontractor for signature by BCL.  On one level there is an argument that BCL benefits from the Appellant’s services insofar as they profit from his employment aboard VOSL vessels because they are remunerated for providing his services since they are entitled to a monthly fee for the provision of all crew.  On the other hand the Respondents argued that there is substantial evidence that the primary benefit lies with VOSL, that the Appellant’s services were not integral to BCL’s business and that VOSL was the economic employer.  The Respondents based their arguments on the Commentaries referred to above.  The Commentaries state explicitly that paragraph 2 has given rise to numerous cases of abuse through adoption of the practice known as “international hiring out of labour” and therefore the term “employer” should be construed in the context of paragraph 2.  The Respondents argued that “person” should be construed in that context and that was accepted by the Tribunal.

23.    In simple English the question for the Tribunal was whether VOSL, a UK resident company, was in fact getting the benefit of the Appellant’s services and therefore whether the payments made by BCL were in fact made by them on behalf of VOSL.  The Contract and the Agreement are helpful in evaluating that.  A key question which the Tribunal had to consider was whether the services rendered in the UK (as defined in paragraph 18 above) had been rendered in an employment relationship rather than under a contract for services concluded in this case between BCL and VOSL.

24.    The connection with a company based in Cyprus is tenuous at best and in any event throughout the Appellant’s employment, as described at paragraph 29 below BCL had subcontracted most of its functions in connection with the Appellant’s employment.  The Contract is governed by English law, the pension provision is with a UK provider and in particular Clause 19.2 provides that in the event that BCL requires the Appellant to attend for interview then that interview would normally take place in the Head Office of the duly appointed representative of VOSL who is the Vessel’s manager.  Given that BCL has a local subcontractor who fulfils almost all of its functions locally, it is surprising, to say the least, that such meetings were not directed to be held in the subcontractor’s offices which are in the immediate vicinity.  That provision alone suggests that the link with VOSL is greater than the link with BCL.

25.    The Contract specifies at Clause 5 that the Appellant is required to work in line with the operational requirements of the vessel and of course that means that his holidays and work schedule are determined by VOSL.  Clause 14 states that Employees must comply with all standing instructions and policies of VOSL.  In the first instance disciplinary and grievance issues are dealt with by VOSL.  As indicated in the preceding paragraph, interviews in that context if the matter is referred to BCL would be held in VOSL’s vessel manager’s head office.  Redundancy payments, if any, are calculated by reference to service on VOSL vessels.

26.    The Contract also uses the term “Company” which is not defined whereas BCL is defined as “Employer” and VOSL (in its former guise) as “Owners”.  Since the word Company is used, for example, in Clause 8.1 in the context of sick pay it might be expected to refer to BCL since in terms of the Agreement although VOSL fund sick pay BCL pays it.  However, Clause 7.1 states that the Company will provide personal protective equipment and then in Clause 7.2 that such equipment will remain the property of the Employer and/or Owners.  Clearly, therefore VOSL is providing equipment.  Further Clause 14.1 states “While serving on Company vessels, Employees are to....” and the vessels in question are owned or operated by VOSL not BSL.  In the context of discipline, Clause 15 states that the Company reserves the right to suspend the employee.  These provisions suggest a level of confusion as to which entity is in fact the Company.  Secondly, there are numerous provisions in the Agreement which suggest that, although contractually VOSL were not the employers, they were effectively acting as employers in all but name and that therefore VOSL was the person who benefitted from the Appellant’s services.

27.    The Agreement sets out the parameters of the relationship between BCL and what is now VOSL.  Clause 3.3(a) specifies that BCL cannot re-assign crew without prior written consent from VOSL.  Clause 3.2.1 and in particular Clause 3.4 make it clear that VOSL not only establish the nature and extent of the qualifications and experience of any crew but also that the Curriculum Vitae and Training certificates for each crew member have to be approved by VOSL before a crew member is deployed on a VOSL vessel.  Accordingly VOSL is exercising explicit detailed control as to which crew are employed.  Clause 3.2.3 provides that BCL shall remove any crew member from a vessel if so requested by VOSL for reasonable cause or in order to comply with Charterer’s requirements so VOSL has the right effectively to dismiss crew members. 

28.    Clause 4 makes it explicit that VOS was responsible for all disbursements and expenses incurred in connection with the provision of services by crew (other than BCL’s own office and staff etc) including, amongst other things, remuneration, redundancy, severance pay, sick pay, travel, taxes, insurance, legal and technical expenses.  Further, any extraordinary expenses had to be agreed with VOSL before being incurred.  In addition VOSL have to ensure that BCL has sufficient funds in the current month to meet redundancy and severance payments.  In terms of Clause 7 there are extensive indemnities by VOSL to BCL.  BCL has no liability for any acts or defaults neither by crew nor for damages in the event of termination of employment at VOSL’s request.

29.    Clearly, BCL is not operating, in this context, as an Industrial company but rather is purportedly in the business of providing crew to a UK based company.  Apart from issuing, but not ingathering, Contracts of Employment and being the employer for contractual and PAYE purposes it subcontracts almost all of its functions in manning the vessels to a UK based company.  In assessing whether the services rendered by the Appellant are an integral part of the business of BCL, a key consideration is to ascertain which “person” or business bears the responsibility or risk for the results produced by the Appellant’s work.  For the reasons set out above it is clear that in this case that is VOSL and thus it does not appear that the nature of the services provided by the Appellant is integral to the business activities of BCL, his formal contractual employer.  The Commentaries set out the additional factors which should be considered where there is thought to be an employment relationship which is different to the formal contractual relationship.  In essence, that means looking at substance over form and considering whether someone other than BCL is effectively the employer with all that that entails.  It is therein that the concept of “economic employer “arises.

30.    It is quite clear from the Contract that at all times it is VOSL which has day to day management and control of the Appellant’s employment and that all the Appellant’s work is performed on vessels which are controlled and operated by VOSL.  VOSL can vet employees before they are assigned to a vessel.  It is VOSL, not BCL which bears all of both the risks and the responsibilities of the Appellant’s employment.  In particular, BCL carried no economic risk in terms of the actual employment of the Appellant.  VOSL reaps the primary benefit of the Appellant’s employment.

31.    It follows from that that the services being provided were very clearly being provided for the benefit of VOSL and not BCL.  The Tribunal finds that BCL paid the remuneration on behalf of VOSL and VOSL is UK resident.  Accordingly Article 15(2(b)) is not satisfied and the appeals fail.

32.    Lastly, since the matter was argued by the Respondent, the Tribunal considered whether or not Article 15(3(c)) was satisfied and found that it was not.  For the reasons set out above, VOSL is the person to whom, or for whose benefit, the relevant dependent personal services are rendered.  It has a permanent establishment and fixed base in the United Kingdom.  It does bear the costs of the remuneration.  Accordingly, this provision cannot assist the Appellant.  In plain English, relief is not available under this provision where a UK based company, which has the benefit of the employee’s services, has borne the costs of remuneration.

33.    In summary, relief from taxation is not available in terms of the Treaty.

34.    Accordingly, in terms of Section 50(6) Taxes Management Act 1970 the amended assessments for 2006/07 and 2008/09 are confirmed.  The effect of that is that there is tax overpaid in 2006/07 in the sum of £1,412.56 and in 2008/09 in the sum of £619.40.

35.    This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.