A subsidiary of Isle of Man-based developer Dandara will have to pay £5.4m in outstanding tax to HMRC in the UK after losing an appeal to the tax tribunal.

And the Upper Tribunal judgment says the decision could potentially pave the way for other companies within the group having to pay HMRC substantial additional sums relating to tax returns going back a number of years.

The appeal focused on the allocation of taxation between the UK and the Isle of Man over profits made by Knights Developments Ltd (KDL) from the acquisition, development and sale of land.

Dandara have been approached to comment on the tribunal.

KDL, incorporated in the island in 2001, is a wholly-owned subsidiary of Dandara UK South Residential Holdings Limited and Dandara UK Property Holdings Limited, which are similarly both resident and registered in the island.

HMRC argued that the profits fell to the UK under the double taxation treaty between the two jurisdictions. It sought additional corporation tax of around £5.4m.

But KDL contended that, as it was not permanently established in the UK, the profits were taxable only in the Isle of Man.

In a judgment handed down on August 25, Mr Justice Nicholas Thompsell and Judge Swami Raghavan dismissed the appeal, concluding that the UK is entitled to tax the company’s profits.

Their judgment states: ‘KDL's appeal is being treated as the lead appeal for a number of related companies within the wider corporate group to which KDL belongs and whose appeals raise materially the same issues and have been stayed pending the determination of this case.

‘The amounts potentially affected by the outcome of those appeals and more widely in relation to other companies in a similar position are substantial (HMRC estimate possible historic refund claims from similarly affected parties of up to £1bn and future lost revenue of up to £230m per year).’

The appeal concerns profits made on a housing development called Knights Wood in Tunbridge Wells, Kent.

KDL purchased the land for £9m in 2010. It did not build the homes itself but entered into design and build contracts with Dandara Limited, an Isle of Man company within the same group which operated through permanent establishments in the UK.

In 2014, KDL entered into an agency agreement with Dandara Limited for the marketing and sale of completed units, under which it agreed to pay commission equal to 1.5% of the sale price of each home.

In its UK corporation tax returns, KDL disclosed profits arising from its property development trade but claimed exemption from UK taxation.

HMRC issued closure notices - its final findings on a tax return - in July 2022 in respect of the tax years ending June 30, 2017 to June 30, 2020, and in September 2022 in respect of the tax year ending June 30, 2021. The notices sought additional corporation tax of approximately £5.4m from KDL.

KDL’s appeal against the closure notices was heard over two days at the Rolls Building in London.

The Upper Tribunal concluded that the profits realised by KDL fall within Article 6 of the arrangements between the UK and the Isle of Man.

It added: ‘It follows that the UK is entitled to tax those profits. The closure notices for the relevant years were therefore correct and are upheld. KDL’s appeal is therefore dismissed.’