In a triumph of co-operation between the UK and South African tax authorities, the Court of Appeal has dismissed a challenge to the scope of the Joint Convention on Mutual Administrative Assistance in Tax Matters (the convention) and ruled that £7.8 million held by a British Virgin Islands (BVI) company in a London bank account was rightly frozen.
A BVI company was liable to the South African Revenue Services (SARS) for about £222 million in unpaid taxes, penalties and interest in respect of the tax years 1998-2000. Judgment had been entered against the company in South Africa but SARS said that it had become aware that monies had been diverted to another BVI company and that a fund of approximately £7.8 million had accrued in a London bank account.
Following the coming into force in October 2011 of a protocol amending an existing double taxation treaty between the UK and the Republic of South Africa, which made provision for mutual assistance in the collection of taxes, SARS made a request to Her Majesty’s Revenue and Customs (HMRC) for assistance in collecting the tax debt.
The High Court subsequently granted relief to HMRC under sections 423-425 of the Insolvency Act 1986 with a view to making the bank deposit available for satisfying the tax debt. Permission was also granted to serve proceedings outside the jurisdiction and the bank deposit was frozen pending trial of the claims.
Dismissing the BVI companies’ challenge to those orders, the Court of Appeal noted that, although the English courts had for centuries declined to enforce the penal and revenue laws of other countries, very substantial inroads into that principle had recently been made by international agreement.
The court rejected the BVI companies’ arguments that the convention did not permit cross-border collection of tax debts in circumstances where such debts were due in respect of tax years commencing prior to the coming into force of the convention. The court also ruled that section 173 of the Finance Act 2006 had retrospective effect and authorised the making of international tax enforcement arrangements in relation to tax liabilities which arose before that section came into force on July 19 2006.