Dandara tax appeal – Introduction
The Upper Tribunal has handed HMRC a significant victory in a case that could have implications for other offshore developers with UK property interests.
Knights Developments Limited, part of the Dandara group, has lost its appeal against tax assessments totalling £5.4 million… and the wider stakes might well run into hundreds of millions of pounds.
The Facts
Knights Developments, an Isle of Man company within the Dandara group, developed and sold residential properties in Kent.
The company argued that under the UK-Isle of Man Double Taxation Agreement, its profits should be taxable only in the Isle of Man because it had no permanent establishment in the United Kingdom.
HMRC disagreed.
The Revenue issued assessments totalling approximately £5.4 million, arguing that the profits fell within Article 6 of the tax treaty as “income derived from immovable property” and were therefore taxable in the UK regardless of where the company was resident.
The Upper Tribunal agreed with HMRC.
The Legal Issue: What Is “Income from Immovable Property”?
The central question was whether profits from developing and selling UK land constitute “income derived from immovable property” under Article 6 of the treaty, or whether they are business profits taxable only in the jurisdiction of residence.
Knights Developments argued that Article 6 was designed to capture passive income from property, rental income, in essence, not active trading profits from buying, developing and selling land.
The profits, they contended, were business profits that should be taxed only in the Isle of Man under Article 7, given the absence of a UK permanent establishment.
The tribunal rejected this interpretation. Judges concluded that profits from acquiring, developing and selling UK land have a sufficiently direct connection to that immovable property to fall within Article 6.
The fact that the profits arose on sale rather than through rental income did not exclude them from the provision.
Why This Matters?
This is not just about £5.4 million. The tribunal noted that this case is being treated as a lead appeal for a number of related companies within the Dandara structure.
HMRC told the court that the outcome could affect historic claims and future tax revenues worth hundreds of millions of pounds.
The decision will be closely watched by other offshore developers who have structured their UK property activities through Isle of Man or other treaty jurisdictions on the basis that, absent a UK permanent establishment, their profits would be taxable only offshore.
Reinforcing UK Taxing Rights
The judgment clarifies how OECD-style tax treaty provisions apply between the UK and the Isle of Man and reinforces the United Kingdom’s right to tax profits generated from UK property developments, even where the developer is based offshore.
This aligns with the broader trend in international taxation of preserving source-state taxing rights over income closely connected to that state’s territory.
Property development profits have an obvious and direct nexus to the land being developed, taxing those profits in the jurisdiction where the land sits makes intuitive sense.
Lessons for Offshore Structures
The Danadara decision offers several warnings for those using offshore vehicles for UK property activities:
- Treaty interpretation follows substance: Courts will look at the nature and source of the income, not merely its characterisation. Development profits from UK land are UK-sourced income, whatever you call them.
- Article 6 is broader than rental income: The “immovable property” provisions in tax treaties capture more than passive rental streams. Active development profits with a direct connection to UK land can fall within their scope.
- Permanent establishment is not the only gateway: The absence of a UK permanent establishment does not automatically mean UK profits escape UK tax. Article 6 operates independently of the PE rules.
- Historic positions may be vulnerable: If your offshore structure has relied on similar reasoning, this judgment significantly undermines that position. The reference to “hundreds of millions” in potential impact suggests HMRC is prepared to pursue historic years.
What’s Next?
Given the sums involved, further appeal cannot be ruled out.
However, the Upper Tribunal’s reasoning appears sound and consistent with the ordinary meaning of the treaty provisions. Property development profits derived from UK land are income from immovable property… and the UK has the right to tax them.
For offshore developers, the message is clear: structuring through a treaty jurisdiction will not insulate UK property profits from UK tax where those profits have a direct connection to UK land. The taxman’s reach extends further than many had hoped.
Knights Developments Limited v HMRC [2026] UKUT (lead appeal in the Dandara group litigation)