SKATtered Dreams: UK Supreme Court Limits Revenue Rule, Danish Tax Authority’s Fraud Claim Goes to Trial
This post has been written by Dr Bobby Lindsay, Lecturer at the University of Glasgow. He is the author of a forthcoming book in the OUP Private International Law Series, entitled Cross Border Public Law Claims: Private International Law’s Exclusionary Rules.
Introduction
It is not uncommon for a Rule formulated within Dicey, Morris and Collins to be treated by English lawyers with near-legislative reverence. Fentiman (‘English Private International Law at the End of the Twentieth Century’ in Symeonides (ed), Private International Law at the End of the Twentieth Century, 1999, p169) has noted the impression that, at least in practice, ‘coherence in the conflict of laws means coherence with that legendary work’. Even still, it is remarkable for a judgment of the UK Supreme Court to be framed almost exclusively around an inquiry into the scope of one of the Dicey rules. Rule 20(1) of the latest (16th) edition states:
English courts have no jurisdiction to entertain an action:
(1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state
In Skatteforvaltningen (‘SKAT’) v Solo Capital Partners LLP [2023] UKSC 40, the ‘essential questions’ were identified to be the scope of Rule 20(1) and its application to the facts, which concerned an alleged widescale fraud on the Danish tax authority ([2]). It marks the first time the apex court has considered the revenue rule since Re State of Norway’s Application [1990] 1 AC 723 in 1989, and the first time it directly has addressed the ‘other public law’ strand of Rule 20(1).
Facts and Procedural History
The Danish tax authorities already have contributed to our understanding of the scope of what is now Rule 20(1). But the £4 million sought (via a nominee liquidator) by SKAT’s predecessor in QRS v Frandsen [1999] 1 WLR 2169 pales in significance compared to the £1.44 billion sought by SKAT in the present litigation. The case related to ‘cum-ex’ schemes (also known as ‘dividend stripping’). To create the impression that multiple parties owned shares with dividend entitlements, companies would trade shares with (cum) and without (ex) dividend rights at high volume. That impression allowed those multiple parties to present to tax authorities as meeting the criteria for refunds in respect of dividend tax, when only one party – the true owner of the dividend-entitled shares – could legitimately claim such a refund.
Solo Capital Partners (‘SCP’), the appellants, allegedly assisted companies with such a scheme to SKAT’s detriment. Non-residents of Denmark are liable to pay 27% in ‘withholding’ tax (WHT) on dividends received from Danish companies. Before paying out on dividends, Danish companies will withhold the tax which is due and pay this to SKAT to discharge the shareholder’s liability, before passing on the residue to the shareholder or their agent. However, taxpayers falling under provisions of relevant double taxation treaties were entitled to receive a full or partial refund in relation to the withheld WHT. Clients of SCP presented themselves to SKAT as entitled to WHT refunds, which they duly received. But SKAT later alleged that those clients never owned the relevant shares, never were liable for WHT, and were not entitled to those refunds. The scale of the fraud has become a national Danish scandal, and one factor behind the reorganisation of SKAT into seven separate authorities.
Tortious, equitable, and restitutionary claims (in English and Danish law) were brought by SKAT in England against (as at the time of the Supreme Court’s decision) 89 defendants, including SCP and associated parties. To keep such mass litigation manageable, trials of two preliminary issues were directed: the first on jurisdiction; the second to establish what constituted a valid WHT application under Danish tax law. Andrew Baker J found against SKAT on the jurisdiction point ([2021] EWHC 974 (Comm)), holding that SKAT’s claims were inadmissible attempts to enforce Danish revenue law. This was reversed by the Court of Appeal ([2022] EWCA Civ 234). Permission to appeal to the Supreme Court successfully was obtained by SCP; the trial of the second preliminary issue continued to judgment while the Supreme Court heard the jurisdiction point.
Judgment
Lord Lloyd-Jones first notes ([21]) the suggestion of the editors of Dicey, Morris and Collins that the rule does not really go to the existence of the English court’s jurisdiction, but to its exercise. His Lordship then observes the distinction between the enforcement of a revenue law (which is forbidden) and the recognition of such a law (which is permitted). He then goes on ([22]) to discuss the two primary justifications which have been put forward for the rule. First, sovereignty: by submitting a tax claim in State B, State A exceeds the bounds of its own sovereignty in an impermissible manner. Secondly, the avoidance of embarrassment: the admittance of revenue claims might risk the forum having to declare a particular foreign tax as contrary to public policy, and so wholesale rejection is said to be the safest court. Lord Lloyd-Jones disfavoured the second rationale. English courts, eg in asylum cases, or those involving forum non conveniens and the foreign act of state doctrine(s), may have cause to criticise the conduct of foreign states, their institutions, or their legal system. The sovereignty rationale provided ‘a principled basis’ for the rule.
The key dispute between the parties was whether the existence of an unsatisfied foreign revenue claim was a prerequisite for the application of the revenue rule ([23]). Lord Lloyd-Jones surveyed ([24]-[32]) revenue law authorities from Sydney Municipal Council v Bull [1909] 1 KB 7 up to Webb v Webb [2020] UKPC 22. In each, the relevant court operated on the assumption that the revenue law rule prohibits the collection or recovery of tax which has not been paid. Importantly, this was consistent with the speeches in the House of Lords in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] AC 368 (see [27]-[29]). There, Lord Mackay noted (at 441A) that the ‘enforcement’ of a foreign revenue law could not be said to arise where ‘no claim under that law remained unsatisfied’: an ‘unsatisfied claim’ was an ‘essential feature’ of the application of the revenue rule.
Lord Lloyd-Jones concluded ([36]) that the existence of an unsatisfied demand for tax was a prerequisite for the application of the revenue rule. Without such a claim, the foreign tax authority’s action cannot be said to involve the enforcement of the foreign revenue law. Not only was this consistent with the ratio of Williams & Humbert, but the limitation was consistent with the sovereignty-based rationale for the revenue rule: if no tax was due, then the tax authority’s claim could not be an extraterritorial assertion of the sovereign power to impose tax. It also cohered with the enforcement/recognition distinction. As the whole basis of SKAT’s claim was that no tax was due from the relevant parties at any point, the revenue rule was not engaged on the facts ([38]-[39]). While the ‘Danish tax system undoubtedly provided the context and opportunity for the alleged fraud and the operation of the fraud can be understood only by an examination of that system’, that did not make the claim one for the enforcement of Danish tax law. At most, the resolution of the claims would involve the recognition of various aspects of the Danish tax regime by the English courts, which was permissible. These were simply private law claims of the same variety as enjoyed by ‘all legal and natural persons’ ([42]).
Nor were the claims precluded by the wider ‘sovereign power’ rule: it was not a claim to recover amounts imposed by Danish public law and did not involve the exercise of any ‘prerogative right’ ([53]-[54]). The test in Mbasogo v Logo Ltd [2006] EWCA Civ 1370, focusing on the exercise of a peculiarly sovereign/prerogative/pubic right, effectively was endorsed ([55]-[57]). Any initial exercise of sovereignty by Denmark was too remote from the claims before the English courts to see them fall foul of that test; the tax regime merely provided the context for the restitutionary claims, which could have been pursued by any private party ([58]). That conclusion was not altered by the fact that SKAT had acquired evidence through sovereign powers: that was ‘at most, of merely peripheral significance’ to the characterisation of the claim ([61]). The claims, therefore, fell entirely outside the scope of Rule 20(1), and now may proceed to trial, which presently is listed to take place for well over one year.
Comment
The judgment in SKAT puts it beyond doubt that an unsatisfied tax claim due under foreign law is a prerequisite for the application of the revenue rule. In a decision handed down between the High Court and Court of Appeal judgments in SKAT, a majority of the Hong Kong Court of Appeal refused to conclude definitively on this point. Andrew Baker J’s first instance judgment played some role in the hesitancy of the majority; the categorical view of a unanimous UK Supreme Court to the contrary will no doubt influence the future position in Hong Kong and elsewhere.
Despite clearly stating the limits of the revenue rule, the decision does not give much succour to those (such as the present author) who would like to see the rule pared back. The rule still is alive and well. In discussing the conspiracy claim brought by HMRC in Case C-49/12 Sunico, Lord Lloyd-Jones opines ([44]-[47]) that private law actions brought by a foreign tax authority still will be caught by the revenue rule if their success would have the effect of making good on an unsatisfied tax claim. That stands in opposition to conclusions reached (albeit on a preliminary basis) in Hong Kong and Singapore, but a similar approach recently has been adopted in Gibraltar. The rule still will constitute a firm barrier to attempts by foreign tax authorities to pursue claims for tax the payment which has been evaded by fraudsters.
The judgment also confirms that the ‘other public law’ rule, possibly rebranded as the ‘sovereign authority rule’, definitively forms part of the exclusionary rules of English private international law. That raises the question of its relationship with the revenue and penal law rules. Rule 20(1) suggests the ‘other public law’ rule sits alongside the revenue and penal rules. However, following SKAT, it seems that the ‘sovereign authority rule’ is a higher-order principle, and that the revenue and penal law rules are specific categories of its operation. Lord Lloyd-Jones notes ([54]) that ‘it would require exceptional circumstances’ to bring a claim falling outside the revenue rule within the ‘wider sovereign authority rule’, and it is difficult to envisage what such circumstances could entail. Lord Lloyd-Jones notes ([62]) that the sovereign authority rule, but not the revenue rule, may be subject to a public policy exception. While it might seem strange that a public policy exception operates at the general, but not the specific, level, the situation can be compared (loosely and impressionistically) with the law of negligence. There, a claim falling within an established category attracts the application of fixed rules, but a novel claim invites wider considerations of policy. The existence of that policy stopgap perhaps makes up for the fact that definition of what is an ‘other foreign public law’, or what involves the exercise of foreign ‘sovereign authority’, sometimes can be elusive.
Whether the Supreme Court’s analysis of SKAT’s claim makes that definitional exercise any more straightforward is a question for another time. More, too, could be said about Rule 20 being described as one which goes to the ‘admissibility’ of foreign claims (eg [1], [15], [39]). The Supreme Court’s faith in the ‘sovereignty’ justification, rendered contestable by convincing attacks by Carter, and a sustained recent critique by O’Hanlon, also deserves further comment. And nothing in the decision does much to help illuminate the precise relationship between Rule 20(1) (the revenue rule, the penal rule, and the ‘sovereign authority’ rule) and Rule 20(2) (the various act of state doctrines). But, on the narrow question presented to the Court, its very clear limitation of the revenue rule is to be welcomed.
