Guernsey Legal Resources

The Commissioners for Her Majesty’s Revenue & Customs (“HMRC”) seek leave to appeal against the decision of the Royal Court (Collas,

2 RBC Trust Company (Guernsey) Ltd. (“RBC”) is the sole trustee of a pension fund known as the Abacus Global Approved Managed Pension Trust, established by a trust instrument dated February 27th, 1987. A sub-scheme called the Banker’s Trust International Pension Scheme (“the sub-scheme”) was created in January 1993. Emmanuel Gresh was born on December 1st, 1955 and became a member of the sub-scheme when he was an employee of Banker’s Trust.

3 On October 10th, 2006, HMRC advised Frank Hirth PLC, Mr. Gresh’s tax advisers in England, that Mr. Gresh’s pension was not taxable under the special UK tax rules for benefits received under “employer-financed retirement benefit schemes,” and that therefore, assuming that the “income” to which Mr. Gresh was entitled under the sub-scheme represented “payment of pension income,” it would only be taxable in the United Kingdom if it were remitted to the United Kingdom.

4 On November 17th and 20th, 2006, RBC decided to make a distribution to Mr. Gresh of all the funds held for Mr. Gresh’s benefit under the sub-scheme (“the distribution”). A total of £1,462,280.51 was paid to Mr. Gresh in the form of a lump sum to Mr. Gresh’s offshore bank account at UBS AG Jersey. It may be noted that it is the distribution which is now said by the HMRC to have attracted tax in the United Kingdom, but no assessment has yet been issued in respect of that tax by HMRC.

5 In 2007, it was realized by RBC that the distribution may not have amounted to the payment of a “pension,” since it did not involve any periodical payments over time, and, further, that if the distribution were legally effective it would be treated as a lump sum and be subject to 40% UK personal income tax under the rules for benefits received from employer-financed retirement benefit schemes.

6 Remedial steps were quickly taken, and on April 3rd and 4th, 2008, the distribution was revoked and funds were provided to RBC on loan which were used to fund a three-instalment pension for Mr. Gresh from Freedom 2005 International Pension Plan (“Freedom”). RBC would then be repaid the loan it had obtained and used to fund Mr. Gresh’s Freedom pension, from the amount returnable to the sub-scheme under any order of the Guernsey Court declaring the distribution void, whether before or after April 6th, 2008. These connected steps are referred to as the “new scheme.”

7 In these circumstances, RBC first issued proceedings on August 15th, 2008 for an order, pursuant to s.69 of the Trusts (Guernsey) Law 2007 and the rule in In re Hastings-Bass (Decd.) (1), that the distribution be declared void ab initio. HMRC applied to be joined to that application on November 11th, 2008. On March 19th, 2009, RBC withdrew its application with costs reserved, and on March 24th, 2009 Mr. Gresh issued these proceedings for an order in like terms to those that had been sought by RBC.

8 On March 27th, 2009, HMRC applied to be joined to Mr. Gresh’s application under r.37 of the Royal Court Civil Rules 2007, which provides as follows:

“(1) The Court may in any proceedings order that—

. . .

(b)    any person—

. . .

(ii)    between whom and any party to the proceedings there exists a question or issue arising out of or relating to or connected with any relief or remedy claimed in the proceedings which, in the opinion of the Court, it would be just and convenient to determine as between him and that party as well as between the parties to the proceedings,

shall be added as a party.”

It is common ground that r.37, therefore, requires the following three matters to be established:

    (i) There must be a question or issue between HMRC and a party to the action.

    (ii) The question or issue must arise out of or relate to or be connected with any relief or remedy claimed in the proceedings.

    (iii) It must be just and convenient to determine the issue as between HMRC and that party as well as between the parties to the proceedings.

9 It is also clear that even if these three requirements are satisfied, there is an overriding discretion in the court, as appears from the opening words of r.37, to the effect that “the Court may in any proceedings order . . .” [Emphasis supplied.]

    (i) the issue between the HMRC and Mr. Gresh was whether UK tax was payable arising from the distribution and/or the new scheme;

    (ii) the issue between the parties to the action was the entirely different one of whether the distribution was valid or void ab initio; and

    (iii) even if the issues were the same, the requirements would not be met because the Guernsey court would not be deciding the issue as to the charge to UK taxation.

    (i) the fact that HMRC has said it will not, unless it is joined, be bound by the Guernsey court’s decision as to the validity of the distribution means its joinder is not justified;

    (ii) the issue of the validity of the distribution will not have to be separately litigated if HMRC is not joined;

    (iii) it was wrong to suggest that the proceedings will not be defended or properly defended unless HMRC is joined;

    (iv) HMRC can, anyway, make written submissions; and

    (v) HMRC is seeking here indirectly to enforce a foreign revenue law.

    (1) The Deputy Bailiff wrongly characterized the issue between HMRC and Mr. Gresh, which was simply the validity of the distribution. That issue is indeed to be determined in the Guernsey proceedings, and the issue of Mr. Gresh’s UK tax liability is connected with it.

    (2) HMRC seeks to take part in an issue that affects its right to tax. This requires the Guernsey court to recognize its right to tax, not to enforce it.

    (3) It was indeed just and convenient that HMRC should be joined because—

i(i)    HMRC will not be bound by the Guernsey court’s decision as to the validity of the distribution unless it is joined, so the issue will indeed have to be re-litigated; and

(ii)    the proceedings will not be properly defended unless HMRC is joined.

13 It is clear that the Court of Appeal will only grant leave to appeal if there is a reasonable chance of success, and where the exercise of a

14 Nonetheless, we have taken the clear view that leave should be allowed, since there is a reasonable chance of success. If HMRC’s legal grounds set out above were to be right (and we think them to be clearly arguable), the basis of the exercise of the Deputy Bailiff’s discretion would be thrown into doubt, and this court would have to exercise the discretion afresh. We turn, then, to deal with HMRC’s substantive grounds of appeal.

15 The main issues to be decided between Mr. Gresh and RBC seem to us to be (i) whether, in accordance with s.69 of the Trusts (Guernsey) Law 2007 and the rule in Hastings-Bass (1), the distribution should be declared void ab initio, or voidable; and (ii) what the effect of the revocation was.

16 The Deputy Bailiff held that the issue arising between HMRC and Mr. Gresh was whether the distribution and/or the new scheme were liable to UK taxation, and plainly such an issue or issues may arise between them now or in the future in England. But the issue of whether the distribution is liable to UK taxation (the “taxation issue”) will never arise if HMRC is joined to these proceedings, and the distribution is declared void ab initio by the Royal Court, and HMRC adheres to its agreement to abide by the Royal Court’s decision (if it is allowed to participate in the hearing). Conversely, of course, the taxation issue will arise if the Royal Court refuses to declare the distribution void. In that event, there may well be a contest before the tax tribunal in England. However, in that contest, HMRC will not contend that the Royal Court’s decision was wrong or should not be recognized, unless it has not been joined and allowed to participate in the argument before the Royal Court.

17 We have considered carefully the issues that may be said to have arisen between HMRC and Mr. Gresh. HMRC has claimed UK tax arising from the distribution. Though no assessment has yet been issued, Mr. Gresh has already acted on that claim by procuring the revocation of the distribution and bringing these proceedings to have the distribution declared void. HMRC has contended that the revocation was ineffective and that the distribution was valid, and so taxable.

18 It seems to us, therefore, that the issues between HMRC and Mr. Gresh that have arisen are as follows: (i) whether the distribution was void or valid; and (ii) whether the distribution is subject to UK tax. Assuming that this application is determined before the issues are decided between HMRC and Mr. Gresh in the United Kingdom (and if HMRC is not joined and so has not agreed to be bound by the Royal Court’s decision), those issues may appear somewhat differently as follows:

    (i) whether the decision of the Guernsey court should be recognized and applied; and

    (ii) if the Guernsey court decision were not applied, whether the Guernsey court would be right to declare the distribution void or (possibly) voidable; and

    (iii) whether, on the basis of the previous decisions, the distribution is subject to UK tax in Mr. Gresh’s hands.

19 There are a number of possible permutations, but, in essence, whichever way one regards the issues that have arisen between HMRC and Mr. Gresh, we take the view that the primary question that needs to be resolved between them is whether the distribution is valid or void. This is the essential precursor to any liability to UK tax. If the distribution is void, there will be no UK tax upon it. If it is valid or voidable, there will or may be such a charge to UK tax.

20 Thus, in substance, the primary issue between HMRC and Mr. Gresh is very similar, or identical, to the first issue before the Royal Court as between Mr. Gresh and RBC.

“I have therefore concluded that the issue to be determined in the Hastings-Bass application is not the issue that is to be determined between HMRC and Mr. Gresh. Even if I am wrong and it could properly be said that the question of Mr. Gresh’s UK income tax liability arises from, relates to, or is connected with the subject-matter of the Hastings-Bass application, the requirements of r.37 of the 2007 Rules would not be satisfied because that question will not be determined by the Royal Court.”

22 We think that the Deputy Bailiff failed to acknowledge that the issue of whether the distribution was valid or void would arise both between Mr. Gresh and HMRC, and between Mr. Gresh and RBC. The Deputy Bailiff focused on the taxation issue without acknowledging that the question of the validity or otherwise of the distribution was a prior and potentially determinative issue. Moreover, the Deputy Bailiff seems to have thought that the issues had to be identical in order to engage r.37. We think he ought to have accepted that it was sufficient for the issue of the validity of the distribution arising between HMRC and Mr. Gresh to have been shown to be related to or connected with the claim in these proceedings that the distribution should be declared void or voidable. In our judgment, HMRC has shown the necessary relation and connection between these issues.

“In my view the rule requires some interest in the would-be intervener which is in some way directly related to the subject matter of the action. A mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough. It may well be impossible, and would in any event be undesirable, to attempt to categorise the situations in which the interests of would-be interveners are sufficient to satisfy the requirements of the rule. The authorities show that the existence of a cause of action between the intervener and one of the parties is not a necessary prerequisite for this purpose. But they also go no further than to show that there must be some direct interest in the subject matter, such as an alleged infringement of a patent, trademark or copyright with which the intervener is concerned (see Tetra Molectric Ltd. v. Japan Imports Ltd. [1976] R.P.C. 547 and Rexnord Inc. v. Rollerchain Distributors [1979] F.S.R. 119) though even in such cases the interest of the intervener must raise an existing issue and not merely a contingent one: see Spelling Goldberg Productions Inc. v. B.P.C. Publishing Ltd. [1981] R.P.C. 280.” [Emphasis supplied.]

24 HMRC does not just have a commercial interest in the outcome. It has a direct interest in the subject-matter of the action, namely, the validity of the distribution. Furthermore, HMRC raises an existing issue, not a contingent one, since the event giving rise to the alleged charge to tax, namely, the distribution, has already occurred.

25 Finally, in this connection, we would mention the judgment of the Royal Court of Jersey in In re Seaton Trustees Ltd. (3), where that court said ([2009] JRC050, at para. 23) that HMRC had no interest in a similar Hastings-Bass application—“only in the UK tax consequences that may flow from it.” If the circumstances were the same in that case as they are here, we would regard that approach as mistaken for the reasons we have given above.

26 In In re State of Norway’s Application (Nos. 1 & 2) (5), the House of Lords held that although the courts would not assist in the direct or indirect enforcement in England of a revenue law of a foreign state, such a rule did not extend to the seeking of assistance in obtaining evidence to be used for the enforcement of the revenue laws of the foreign state in that state itself.

27 Lord Goff endorsed a statement in Dicey, Morris & Collins, 1 The Conflict of Laws as to indirect enforcement as follows ([1990] 1 A.C. at 809):

“. . . [I]ndirect enforcement occurs (1) where the foreign state (or its nominee) in form seeks a remedy which in substance is designed to give the foreign law extraterritorial effect, or (2) where a private party raises a defence based on the foreign law in order to vindicate or assert the right of the foreign state.”

28 Lord Goff continued by saying that he had been unable to discover a case of indirect enforcement going beyond these two propositions. None of the advocates in this case has been able to do so either. We are satisfied that HMRC is not seeking a remedy from this court which is in substance designed to give any foreign law extraterritorial effect, and that HMRC is not raising a defence or an argument in this case based on a foreign law in order to vindicate or assert the rights of a foreign state.

29 In our judgment, the situation described in In re State of Norway (5) is very close (though, of course, not identical) to that pertaining here. The foreign revenue authority here (HMRC) wishes to obtain a ruling which it may be able to use so that it can determine a tax liability in its own state. The exercise it is undertaking here in Guernsey is neither directly nor indirectly enforcing UK revenue law—it is resolving an issue which may be important to the authority in due course in enforcing that foreign revenue legislation in its own home state.

30 It may be that the English courts would take a different attitude to foreign tax enforcement claims now that there are rather more tax exchange information agreements in place. But we do not think that the existing law as explained in In re State of Norway can be said to have changed.

31 The Deputy Bailiff was, therefore, at fault in suggesting that HMRC’s participation in these proceedings could be excluded on the grounds that it would thereby be indirectly enforcing or seeking to enforce a foreign revenue law. We make no comment on whether this question arises under the head of “just and convenient” or not. Either way, it is clear that if this were an attempt indirectly to enforce a foreign revenue law, HMRC would not be permitted to be joined in to the proceedings to do so.

32 It is this point that has given us the greatest cause for concern. Plainly, it is an unusual step for HMRC to participate in overseas litigation, let alone Guernsey litigation, and plainly HMRC could make written submissions if it were excluded from joinder. Moreover, we understand the indulgence that it may be thought the court would be granting by allowing HMRC to litigate this difficult point here.

34 First, we think the Deputy Bailiff was wrong to think that the same issue would not, in practice, be re-litigated if HMRC were not joined. HMRC has said, as we think it is entitled to do, that it would not accept a ruling of the Guernsey court as binding unless it were a party (see Vandervell Trustees Ltd. v. White (6) ([1971] A.C. at 928, per Lord Reid)). Whatever one may think about the prospects of HMRC persuading a different court or tax tribunal to depart from such a decision, it would undoubtedly be its privilege to attempt to do so. But if HMRC is joined, it has accepted and agreed that it will not challenge the outcome, even in UK proceedings. This will avoid re-litigation of the issue of the validity of the distribution, and will lead to a saving of time and costs for all parties.

35 Secondly, we think that there will be advantages to all parties and to the Royal Court in having HMRC as party to this issue. It is not just that RBC has no interest in contesting the issue; HMRC has unrivalled experience in dealing with the issues raised by the rule in Hastings-Bass (1) and will be able to provide that experience to the Royal Court. Of course, it will be partisan, but the courts can gain much assistance from the carefully considered arguments of litigants on all sides.

36 Moreover, HMRC will be able to test the factual evidence before the Royal Court if it is joined, whereas neither RBC nor Mr. Gresh is likely to do so. The affidavit of Ms. Crawford shows that there may well be scope for questions to be asked as to precisely what views were formed and what actually occurred in the period leading up to the distribution.

37 We are conscious also that unless HMRC is joined, it is unlikely that the decision of the Royal Court will go to appeal. In a difficult and developing area such as the application of the rule in Hastings-Bass (1), it may be desirable for a higher court to have the opportunity to consider the important issues of principle raised. Of course, any appeal or appeals will add to the costs, but they will also ensure that the decision receives full and proper scrutiny.

38 The submissions of an amicus curiae would obviously go some way towards restoring the balance, even without HMRC being joined, but we feel that it would nonetheless be helpful if HMRC were joined.

39 In this regard, we have noted that in two cases in England, the courts have commented on the Revenue authority (albeit the domestic one) appearing in similar situations:

    (i) In Vandervell Trustees (6), Lord Reid expressed the view ([1971] A.C. at 929–930) that a rule of court could be made allowing the Inland Revenue to join the proceedings so as to prevent the same issues being

    (ii) In Sieff v. Fox (4), a case that also concerned the rule in Hastings-Bass (1), Lloyd, L.J., sitting at first instance, held expressly ([2005 1 W.L.R. at 3838) that “the court’s task might be easier in some cases if the Inland Revenue did not always decline the invitation to take part in cases of this kind . . .”

40 In response to Lloyd, L.J.’s dictum, we have been told that HMRC issued its Tax Bulletin, Issue 83, dated June 2006, stating that it would give active consideration to intervening in future cases, particularly where there would otherwise be no party in whose interest it would be to argue against the application of the Hastings-Bass principle. We are told that HMRC has also recently been joined as a party to an English application concerning the rule in Hastings-Bass.

41 We therefore have to consider whether it is, in the unusual circumstances of this case, just and convenient to determine as between HMRC and Mr. Gresh, as well as between RBC and Mr. Gresh, the question of the validity of the distribution. We think it would be. It would prevent the matter being re-litigated in England, and it will enable the Guernsey courts to have the benefit of informed and experienced argument on both sides of the debate. We therefore hold that the Deputy Bailiff was wrong to conclude that it was not just and convenient to decide the issue between HMRC and Mr. Gresh.

42 As we have explained, the court has an overall discretion as to whether to allow joinder under r.37. Since we have held that the Deputy Bailiff fell into error in his identification of the issues and the question of whether the three requirements of the rule were satisfied, we are entitled to exercise that discretion afresh.

43 In considering, then, the ultimate question of whether we should allow HMRC to be joined, it has been urged upon us that it would be an unusual—even radical—step, which may set a precedent for the future. It was argued that foreign revenue authorities may seek to join in other actions between private parties to advance propositions that will lead to tax revenues being levied overseas. We have considered these risks anxiously, but we think that the ramifications of our decision are very limited indeed.

44 First, the situation in this case is, as we have said, unusual. The Hastings-Bass (1) issue is one that is highly contentious and has been the

45 Secondly, we doubt that HMRC or any other foreign revenue authority will wish to apply to join any normal proceedings between the parties to trusts or other disputes. There are several reasons for this. In most cases, the requirements would not be satisfied, and if they were, the discretion would be unlikely in a normal case to be exercised in favour of their joinder. We do not pre-judge any situation arising in the future, but we can say that we think that such applications will be few and far between.

46 Thirdly, Guernsey is a transparent, mature and respectable jurisdiction. It is well equipped properly to consider and evaluate the arguments that HMRC will put forward in this case. HMRC’s being allowed, exceptionally, to appear before the Royal Court and argue for the validity of the distribution will carry no more weight than the strength of the arguments themselves. We have every confidence that the Royal Court (and any courts on appeal) can, and will, decide these proceedings according to law. There should be no fear that arguments advanced by any party, be they public or private, foreign or local, will not be dealt with fairly and justly. That is what the courts of Guernsey have done for many years and can be confidently expected to do in the future.

47 For the reasons we have given, we have formed the view that the Deputy Bailiff fell into error. He ought to have held that all three requirements of joinder under r.37(1) were satisfied.

48 In these circumstances, we grant leave to appeal and allow HMRC to be joined as a party to these proceedings, in the capacity of an intervener. We have, therefore, exercised the court’s discretion under r.37 in favour of joinder.

50 On June 8th, 2009, the Deputy Bailiff granted HMRC leave to appeal from his costs decisions in RBC’s application filed on November 11th, 2008, in the event that leave to appeal his substantive order was obtained.

52 Mr. Gresh argued that all these costs should be reserved to the trial of Mr. Gresh’s application in case it is shown that HMRC’s presence in the proceedings is of no value or their submissions are rejected. We think that this would be unjust. RBC and, now, Mr. Gresh have resisted HMRC’s application to be joined both here and below, and they have lost. Costs should follow the event. In our judgment, HMRC’s costs appeal should be allowed, and Mr. Gresh should be ordered to pay HMRC’s costs of both the joinder applications here and below.