A property developer belonging to the group behind some of Jersey’s largest housing developments has lost a £5.4 million tax battle with HMRC – in a case which a court heard had much bigger sums riding on its outcome.

Knights Developments Limited, part of the wider Dandara group, argued that profits from developing and selling homes in England should not be subject to UK corporation tax because the company was resident in the Isle of Man.

But the UK’s Upper Tribunal this week rejected its appeal, ruling that profits made from developing British land amounted to income derived from that property and could therefore be taxed in the UK. 

The case related specifically to tax arrangements between the UK and Isle of Man, and the judgment makes no findings about Dandara’s Jersey operations, though it does offer an insight into the history and structure of a group which has operated in Jersey for more than 30 years.

From the Isle of Man to Jersey

Handed down on 25 August, the judgment recounts that Dandara was founded by Irish businessman Daniel Tynan, who moved to the Isle of Man in the 1980s and began developing property there.

The group subsequently expanded into Guernsey in 1993 and Jersey in 1995 before moving into the UK market.

Knights Developments itself was incorporated in the Isle of Man in 2001 and, during the period covered by the case, was a member of the wider Dandara group.

The dispute concerned its development of Knights Wood in Tunbridge Wells, Kent, where land was acquired for £9 million.

Although physical construction was carried out on its behalf by another Dandara company operating in Britain, the tribunal recorded that strategic decisions were made by Knights Developments in the Isle of Man.

Those included decisions over acquiring sites, development expenditure and financing, setting property prices and approving or rejecting offers from prospective buyers. 

The £5.4m dispute

At the heart of the case was whether Britain could tax the profits Knights Developments made from the UK development.

Outlining the parties’ conflicting positions, the court recorded: “It is common ground that, if HMRC’s interpretation is correct, the profits are chargeable to United Kingdom corporation tax, whereas, if KDL’s interpretation is correct, no tax is payable in the Isle of Man under the applicable Isle of Man corporate tax regime.”

HMRC subsequently issued notices seeking approximately £5.4 million in additional corporation tax.

Knights Developments argued that the relevant provision of the UK–Isle of Man tax agreement covered income generated through the use of property, rather than trading profits generated when a developer eventually sold it.

The tribunal disagreed, instead finding that the natural meaning of “income derived from immovable property” was broad enough to include income arising directly from the “ownership, development and sale” of that property. 

The judges also rejected the idea that the eventual sale could be viewed separately from everything a property developer had done to the land beforehand.

“A property development trade involves substantially more than the passive holding of land pending disposal,” the judgment said.

“The land is employed, altered, improved and commercially deployed in order to generate profit.”

The judges added: “In ordinary language, that constitutes a form of use.”

The tribunal therefore accepted HMRC’s argument that Knights Developments’ profits constituted income derived from the UK property and dismissed the company’s appeal. 

Up to £1bn potentially riding on the outcome

The stakes extended significantly beyond the £5.4 million being sought from Knights Developments, the judgment noted.

It revealed that its case was being treated as the lead appeal for a number of related companies within the wider corporate group, whose cases raised materially similar issues.

HMRC also estimated that companies in similar positions could potentially have pursued historic refund claims of up to £1 billion if Knights Developments’ interpretation prevailed, with as much as £230 million per year in future tax revenue potentially affected.

Describing the sums involved, the tribunal simply noted: “The amounts potentially affected by the outcome of those appeals and more widely in relation to other companies in a similar position are substantial.”

Knights Developments’ appeal was dismissed.