Caglar v Billingham (Inspector of Taxes)

Caglar v Billingham (Inspector of Taxes) and related appeals

Special Commissioner's Decision

[1996] STC (SCD) 150, [1996] 1 LRC 526

HEARING-DATES: 23, 24, 25, 26, 29 January, 7 March 1996

7 March 1996

CATCHWORDS: Emoluments from office or employment - Consul and other officials - Exemption from income tax - Officials of mission of republic not recognised in United Kingdom - Assessments raised on officials - Exemption for employment as official agent for a foreign state - Whether exemption applied only for recognised foreign states - Whether Turkish Republic of Northern Cyprus an unrecognised foreign state - Whether officials Commonwealth citizens - Income and Corporation Taxes Act 1988, s 321(2)(b).

HEADNOTE: C and others (the appellants) were employed in the London office of the Turkish Republic of Northern Cyprus. The 1960 Treaty of Establishment and the Cyprus Act 1960 had provided that the Republic of Cyprus should comprise the entirety of the island of Cyprus with the exception of the two United Kingdom sovereign base areas. Since 1974 the northern part of Cyprus had been under the occupation of Turkish troops and outside the control of the government of the Republic of Cyprus. In 1983 an assembly elected by the Turkish Cypriot community had declared that the territory north of the buffer zone between the Turkish and Greek Cypriot communities was an independent state under the name of the Turkish Republic of Northern Cyprus. The Turkish Republic of Northern Cyprus had not been recognised as a state by Her Majesty's government or by any other state, except Turkey. An office representing the Turkish Cypriot community within the Republic of Cyprus had been established in London before 1975. Her Majesty's government did not treat that office as a diplomatic mission or as representing a foreign state. In 1989 the Foreign and Commonwealth Office had issued a certificate certifying that the Turkish Republic of Northern Cyprus was not a state for the purposes of Part I of the State Immunity Act 1978 and had issued a certificate under s 4 of the Diplomatic Privileges Act 1964 that four of the appellants had not been notified to that office as members of a diplomatic mission in the United Kingdom. By virtue of the 1960 Treaty of Establishment, art 198 of the Constitution of the Republic of Cyprus 1960 and the 1967 Republic of Cyprus Citizenship Law, the Republic of Cyprus had jurisdiction over all those born or descended from those born on the island. The countries listed in the British Nationality Act 1981 whose citizens were Commonwealth citizens included the Republic of Cyprus but not the Turkish Republic of Northern Cyprus. The appellants were assessed to income tax under Sch E in respect of their earnings. They contended that their income was exempt from income tax under s 321(2)(b) of the Income and Corporation Taxes Act (the 1988 Act) because they were employed as official agents for a foreign state and they were not Commonwealth citizens. The Revenue contended: (1) that the reference to 'any foreign state' in s 321(2)(b) meant any foreign state recognised by Her Majesty's government; (2) that the Turkish Republic of Northern Cyprus was not a foreign state; and (3) that the appellants were Commonwealth citizens.

Held - (1) In the context of the other provisions in the 1988 Act which gave exemption from income tax to representatives of foreign states, it was the intention of Parliament that the reference in s 321(2)(b) to 'any foreign state' should mean any foreign state recognised by Her Majesty's government. Since by virtue of the Cyprus Act 1960 the only state on the island of Cyprus recognised by Her Majesty's government was the Republic of Cyprus, the Turkish Republic of Northern Cyprus was not therefore a foreign state for the purposes of s 321(2)(b). Moreover, it would have been contrary to public policy to take cognisance of the Turkish Republic of Northern Cyprus as that would have involved the commissioners in acting inconsistently with the foreign policy and diplomatic stance of the United Kingdom. It followed that the appellants, who

were the representatives of the Turkish Republic of Northern Cyprus, were not entitled to the exemption in s 321(2)(b).

(2) Since the Turkish Republic of Northern Cyprus was not recognised by any member of the international community other than Turkey, it did not have functional independence because it could not enter into relations with other states, which was one of the requirements of statehood. If the reference in s 321(2)(b) to 'any foreign state' had had to be interpreted as including states not recognised by Her Majesty's government, the Turkish Republic of Northern Cyprus would accordingly not have been such a state, since it failed to satisfy all the requirements of statehood.

(3) Even if s 321(2)(b) would otherwise have applied, the burden would have remained on the appellants to prove that they were not Commonwealth citizens. The question would have had to be answered separately in relation to each appellant in respect of each year of assessment. By virtue of art 198 of the constitution or the 1967 Republic of Cyprus Citizenship Law C was a citizen of the Republic of Cyprus. Moreover, a finding that the appellants were not Commonwealth citizens could have had adverse effects on the rights of all Turkish Cypriots under the Representation of the People Act 1983 and the Immigration Act 1971. It was therefore clear that Parliament intended all citizens of the Republic of Cyprus, as it was defined in the Cyprus Act 1960, to be Commonwealth citizens. Furthermore, the citizenship laws of the Turkish Republic of Cyprus could not be recognised, since the laws of citizenship were so related to the status of sovereign states in international law, and to their capability of offering diplomatic protection, that they were not within the category of laws which the courts would recognise even when made by an unrecognised government. Accordingly C had the status of a Commonwealth citizen. The appeals would therefore be dismissed.

NOTES:

For diplomatic privilege, see Simon's Direct Tax Service E5.401.

For the Income and Corporation Taxes Act 1988, s 321(2)(b), see ibid, Part G1.

CASES-REF-TO:

A-G of the Republic v Mustafa Ibrahim 1964 CLR 195, Cyprus SC.

Aegean Sea Continental Shelf Case (Greece and Turkey) (1978) ICJR 3.

Aksionairnoye Obschestvo A M Luther v James Sagor & Co [1921] 3 KB 532, CA.

Al-Fin Corps Patent, Re [1970] Ch 160, [1969] 3 All ER 396.

Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] STC 635, [1987] 3 All ER 1050, 60 TC 359, CA.

Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853, [1966] 2 All ER 536, HL.

Chamberlain's Settlement, Re, Chamberlain v Chamberlain [1921] 2 Ch 533.

Compania Naviera Vascongada v SS Cristina [1938] AC 485, [1938] 1 All ER 719, HL.

Deutsche Continental Gas-Gesellschaft v Polish State (1929-30) 5 ILR 11.

East Timor (Portugal v Australia), Case concerning (1995) ICJR 90.

Engelke v Musmann [1928] AC 433, HL.

Fenton Textile Association Ltd v Krassin (1922) 38 TLR 259, CA.

Gur Corp v Trust Bank of Africa Ltd [1987] QB 599, [1986] 3 All ER 449, QBD and CA.

Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] QB 205, [1978] 1 All ER 277, CA; rvsd in part sub nom Hesperides Hotels Ltd v Muftizade [1979] AC 508, [1978] 2 All ER 1168, HL.

Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa), notwithstanding Security Council Resolution 276 (1970) (1971) ICJR 16.

Madras Electric Supply Corp Ltd v Boarland (Inspector of Taxes) [1955] AC 667, [1955] 1 All ER 753, 35 TC 612, HL.

Melluish (Inspector of Taxes) v BMI (No 3) Ltd [1995] STC 964, [1995] 3 WLR 630, [1995] 4 All ER 453, HL.

Nottebohm Case (Liechtenstein v Guatemala) (1955) 22 ILR 349.

Oppenheimer v Cattermole (Inspector of Taxes) [1975] STC 91, [1976] AC 249, [1975] 1 All ER 538, 50 TC 159, HL.

Paley (Princess Olga) v Weisz [1929] 1 KB 718, CA.

Pepper (Inspector of Taxes) v Hart [1992] STC 898, [1993] AC 593, [1993] 1 All ER 42, 65 TC 421, HL.

Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769, [1992] 2 Lloyd's Rep 238, CA.

R v Governor of Pentonville Prison, ex p Osman (No 2) (1988) 88 ILR 378, DC.

R v IRC, ex p Camacq Corp [1989] STC 785, [1990] 1 WLR 191, [1990] 1 All ER 173, 62 TC 651, QBD and CA.

R v Minister of Agriculture Fisheries and Food, ex p S P Anastasiou (Pissouri) Ltd (Case C-432/92) [1994] ECR I-3087, ECJ.

R v Secretary of State for the Home Dept, ex p Bagga [1991] 1 QB 485, [1991] 1 All ER 777, CA.

Reel v Holder [1981] 1 WLR 1226, [1981] 3 All ER 321, CA.

Saudi Arabia v Ahmed (EAT/276/93) (8 October 1993, unreported).

Somalia (Republic of) v Woodhouse Drake & Carey (Suisse) SA, The Mary [1993] QB 54, [1993] 1 All ER 371.

Spain v SS "Arantzazu Mendi", The Arantzazu Mendi [1939] AC 256, [1939] 1 All ER 719, HL.

Spinney's (1948) Ltd v Royal Insurance Co Ltd [1980] 1 Lloyd's Rep 406.

State v Banda 1989 (4) SA (B) 519.

Stoeck v Public Trustee [1921] 2 Ch 67.

Tallinna Laevauhisus A/S v Estonian SS Line (The Vapper) (1947) 80 Ll L Rep 99, CA.

Texas v White (1868) 74 US (7 Wallace) 700, US SC.

Tinoco Arbitration (1923) 1 UN Rep 369.

Trendtex Trading Corp Ltd v Central Bank of Nigeria [1977] QB 529, [1977] 1 All ER 881, CA. Western Sahara (1975) ICJR 12.

COUNSEL: Michael Beloff QC, Lady Fox QC, and Helen Mountfield for the appellants; Launcelot Henderson QC and Christopher Greenwood for the Crown.

PANEL: SPECIAL COMMISSIONERS: STEPHEN OLIVER QC AND DR A N BRICE

JUDGMENTBY-1: DECISION

JUDGMENT-1: DECISION: The appeal

1. Mr Resat Caglar, Mr Tansel Fikri, Mr Halil Acarturk, Mr Fikri Direkoglu, Mr Tahsim Ertugruloglu and Mr Alper Genc (the appellants) appeal against assessments to income tax under Sch E for years from 1986-87 to 1994-95.

2. We were provided with a schedule of the amounts assessed but were asked to defer a formal decision on the amounts until after we had given our decision in principle on the issues in the appeal; it was hoped that any question as to the amounts could be resolved by agreement.

3. We were informed that all the assessments had been raised within the six-year time limit mentioned in s 34 of the Taxes Management Act 1970 save for the first two assessments raised on Mr Genc. Mr Henderson QC, for the Revenue, accepted that, with regard to those two assessments, the onus was on the Revenue to prove that the conduct of Mr Genc had been negligent, within the meaning of s 36 of the Taxes Management Act 1970, on the ground that he had failed to submit his returns. We were asked to defer a consideration of that issue until after we had given our decision in principle on the issues in the appeal.

4. On 28 February 1994 the appellants were granted leave to apply for judicial review of the decision of the Revenue to raise the assessments. At a hearing on 15 May 1995 the High Court refused the application for judicial review on the ground that the Special Commissioners were the appropriate appellate body to hear the appeal (see [1995] STC 741).

The statutory provisions

5. Section 321 of the Income and Corporation Taxes Act 1988 (the 1988 Act) provides:

'Consuls and other official agents

(1) Income arising from any office or employment to which this section applies shall be exempt from income tax, and no account shall be taken of any such income in estimating the amount of income for any income tax purposes.

(2) The offices and employments to which this section applies are the following, that is to say --

(a) the office of a consul in the United Kingdom in the service of any foreign state; and

(b) the employment of an official agent in the United Kingdom for any foreign state, not being an employment exercised by a Commonwealth citizen or a citizen of the Republic of Ireland or exercised in connection with any trade, business or other undertaking carried on for the purposes of profit.

(3) In this section --

"consul" means a person recognised by Her Majesty as being a consul- general, consul, vice-consul or consular agent; and

"official agent" means a person, not being a consul, who is employed on the staff of any consulate, official department or agency of a foreign state, not being a department or agency which carries on any trade, business or undertaking for the purposes of profit.'

6. Section 37(1) of the British Nationality Act 1981 (the 1981 Act) provides: 'Every person who -- . . .(b) under any enactment for the time being in force in any country mentioned in Schedule 3 is a citizen of that country, shall have the status of a Commonwealth citizen.'

7. Schedule 3 to the 1981 Act lists 'Countries Whose Citizens are Commonwealth Citizens'. The list includes the Republic of Cyprus but not the Turkish Republic of Northern Cyprus.

The issues

8. During the relevant years the appellants were employed in the London office of the Turkish Republic of Northern Cyprus. They were assessed to income tax under Sch E in respect of their earnings. They argued that their income was exempt from income tax under s 321(2)(b) of the 1988 Act because they were employed as official agents for a foreign state and they were not Commonwealth citizens. The Revenue argued that the Turkish Republic of Northern Cyprus was not a foreign state and that the appellants were Commonwealth citizens.

9. It was not disputed that the Turkish Republic of Northern Cyprus has not been recognised as a state by Her Majesty's government. It was accepted by the Revenue that, if the Turkish Republic of Northern Cyprus were a foreign state within the meaning of s 321(2)(b), then the appellants came within the description of 'official agents' and that their employment was not exercised in connection with any trade, business or other undertaking carried on for the purposes of profit.

The issues

10. The issues for determination in the appeal were: (1) whether the words 'any foreign state' in s 321(2)(b) were to be interpreted so as to include foreign states not recognised by Her Majesty's government, as argued by the appellants, or whether those words meant any foreign state recognised by Her Majesty's government, as argued by the Revenue; (2) if the words 'any foreign state' were to be interpreted so as to include states not recognised by Her Majesty's government, whether the Turkish Republic of Northern Cyprus was a foreign state, as contended by the appellants, or whether it was not a state because it failed to meet all the requirements of a state, as contended by the Revenue; and (3) whether the appellants were Commonwealth citizens; the appellants argued that they were not and the Revenue argued that they were.

The evidence

11. Most of the facts were undisputed and we were provided with a statement of agreed facts. Mr Beloff QC, for the appellants, also drew our attention to the facts found in Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] QB 205 at 219.

12. Oral evidence was given on behalf of the appellants by Mr Zaim M Necatigil who produced an affidavit which he had sworn on 12 January 1996. Mr Necatigil is a lawyer in Nicosia, Cyprus and gave evidence as an expert in the law applying in the north of Cyprus. He was called to the Bar by the Middle Temple in 1962. He has been in the judicial and legal service of the Turkish Cypriot administration, the Turkish Federated State of Cyprus and the Turkish Republic of Northern Cyprus where he was Attorney General from 1979 to 1988. Since 1990 he has been an elected member of the legislative assembly of the Turkish Republic of Northern Cyprus. He is the author of published books and articles on Cyprus.

13. Evidence was given on behalf of the appellants by affidavit sworn on 3 January 1996 by Mr Resat Caglar, one of the appellants. Mr Caglar is described as the head of the London mission of the Turkish Republic of Northern Cyprus.

14. Oral evidence was given on behalf of the Revenue by Mr Polyvios Polyviou who produced an affidavit which he had sworn on 16 January 1996. Mr Polyviou is an advocate in Nicosia, Cyprus and gave evidence as an expert in the law applying in the south of Cyprus. Mr Polyviou was called to the Bar by Gray's Inn in 1972; between 1974 and 1980 he was a Fellow of Lincoln's College, Oxford; and in his practice he specialises in commercial banking, civil and constitutional law. He is the author of published books and articles on constitutional law and on Cyprus.

15. Evidence was given on behalf of the Revenue by affidavit dated 10 January 1996 by Mr Haydon Boyd Warren-Gash, a member of Her Majesty's Diplomatic Service and the head of the Southern European Department of the Foreign and Commonwealth Office.

16. The affidavits of Mr Necatigil, Mr Polyviou and Mr Warren-Gash exhibited a number of documents of a factual nature.

The facts

17. From the evidence before us we find the following facts which we have arranged in three parts. The first relates to the island of Cyprus; the second to certain provisions about citizenship; and the last to the appellants and their office.

Part I -- The island of Cyprus

18. The population of the island of Cyprus consists of a Greek Cypriot community and a Turkish Cypriot community. The Greek Cypriot community is descended from settlers from the Greek mainland and the Turkish Cypriot community is descended from Turkish settlers who came to the island when it was part of the Ottoman Empire. Of the total population, about three-quarters are Greek Cypriots and one-quarter Turkish Cypriots. For many years the two communities co-existed and the population was intermingled throughout the whole of the island. There were Greek villages and Turkish villages but the main towns and some villages had mixed populations. More Turkish Cypriots lived in the north than in the south.

19. In 1914 the island of Cyprus was annexed by Great Britain and from 1925 to 1960 it had the status of a Crown Colony.

20. On 11 February 1959 an agreement (known as the Zurich Agreement) was reached between Greece and Turkey on independence for Cyprus. This was accepted by the United Kingdom at a London conference attended by representatives of Greece, Turkey, the United Kingdom, the Greek Cypriot community and the Turkish Cypriot community. The conference led to the London Agreement of 19 February 1959 (London, 19 February 1959; Misc 4 (1959); Cmnd 679, and Misc 5 (1959); Cmnd 780). This was followed by the passing of the Cyprus Act 1960 on 29 July 1960 and by the signature of three treaties on 16 August 1960. The three treaties were the Treaty of Establishment (Nicosia, 16 August 1960; TS 4 (1961); Cmnd 1252) and the Treaty of Guarantee (Nicosia, 16 August 1960; TS 5 (1961); Cmnd 1253), to which the United Kingdom, Greece, Turkey and the Republic of Cyprus were parties; and the Treaty of Military Alliance to which Greece, Turkey and the Republic of Cyprus were parties (see Misc 4 (1959); Cmnd 679).

21. The Cyprus Act 1960 provided that Her Majesty might, by Order in Council, declare that the constitution designated in the order as the Constitution of the Republic of Cyprus should come into force on a specified day, on which should be established the independent sovereign Republic of Cyprus. The Act also provided that the existing laws should continue to apply until amended by the authority having the power to amend them.

22. Article 1 of the Treaty of Establishment and s 2(1) of the Cyprus Act 1960 provided that the Republic of Cyprus should comprise the entirety of the island of Cyprus with the exception of the two United Kingdom sovereign base areas of Akrotiri and Dhekelia.

23. In art I of the Treaty of Guarantee the Republic of Cyprus declared as prohibited any activity likely to promote union with any other state or partition of the island. In art II Greece, Turkey and the United Kingdom undertook to ensure the maintenance of the independence, territorial integrity and security of the Republic of Cyprus and also the Basic Articles of the constitution. In art IV the signatories undertook that, in the event of any breach, each of the guaranteeing powers reserved the right to take action with the sole aim of re-establishing the state of affairs enacted by the treaty.

24. In the Treaty of Military Alliance the signatories undertook to resist any act of aggression directed against the independence or territorial integrity of the Republic of Cyprus.

The Constitution of the Republic of Cyprus

25. The Constitution of the Republic of Cyprus was signed in Nicosia on 16 August 1960 by the then governor on behalf of the British government; by representatives of the governments of Greece and Turkey; and by representatives of the Greek and Turkish Cypriot communities. The constitution was published as Cmnd 1093 (July 1960).

26. The constitution contained a number of provisions designed to protect the rights of Turkish Cypriots. These were incorporated from the Zurich Agreement of 11 February 1959 and were called the Basic Articles of the constitution. They included: art 1 which provided that the State of Cyprus was an independent and sovereign republic, with a presidential regime, the president being Greek and the vice-president being Turkish, elected by the Greek and Turkish communities of Cyprus respectively; art 46 which provided that the Council of Ministers was composed of seven Greek ministers and three Turkish ministers; art 62 which provided that the number of representatives in the House of Representatives should be 50 and that 75% should be elected by the Greek community and 30% by the Turkish community; art 78 which provided that, although decisions of the House of Representatives should normally be passed by a simple majority, any modification to the electoral law required a separate simple majority of the representatives elected by the Greek and Turkish communities respectively; arts 86 and 87 which provided that each Community should exercise autonomy in matters of religion, education, culture, personal status and family affairs through separate Communal Chambers which were given legislative and executive powers; art 133 which provided that there should be a Supreme Constitutional Court composed of a neutral judge as president with one Greek judge and one Turkish judge as members; art 153 which provided that there should be a High Court of Justice composed of one neutral judge as president with two Greek judges and one Turkish judge as members; art 181 which provided that the Treaties of Guarantee and Military Alliance should have constitutional force; art 182 which provided that the articles mentioned in Annex III, which had been incorporated in the Zurich Agreement of 11 February 1959, were Basic Articles of the constitution and could not be in any way amended, whether by way of variation, addition or repeal; and art 185 which provided that total or partial union with any other state or separatist independence was excluded.

International recognition

27. Following the passing of the Cyprus Act 1960, the signature of the three treaties, and the signature of the constitution, the Republic of Cyprus was established as an independent sovereign state. It was promptly recognised by the international community. It was admitted to the United Nations on 21 September 1960. It became an independent member of the British Commonwealth on 13 March 1961 and became the sixteenth member of the Council of Europe on 24 May 1961.

The events of 1963 to 1967

28. In November 1963 the President of the Republic of Cyprus proposed 13 amendments to the constitution, six of which were to the Basic Articles. These proposals were rejected by the Turkish Cypriot community who then ceased to participate in the organs of the government of the republic. After December 1963 the executive and the House of Representatives were composed of Greek Cypriots alone and the Turkish Cypriot community ceased to recognise the laws passed by the Greek Cypriot community. There were civil disturbances between Greek Cypriots and Turkish Cypriots and United Nations forces were deployed in Cyprus. There were extensive movements of population and Turkish Cypriots congregated in enclaves. Approximately 25,000 Turkish Cypriots moved to the north of the island.

1967 -- The Provisional Cyprus Turkish Administration

29. In December 1967 the Turkish Cypriot community announced the creation of a Provisional Cyprus Turkish Administration and established a provisional Turkish legislature, executive council and judiciary. The provisions of the 1960 Constitution were upheld with such changes as were necessary for the Turkish Cypriot community to administer itself. The following year talks took place between the Greek Cypriot and the Turkish Cypriot communities under the auspices of the United Nations.

The events of 1974

30. On 15 July 1974 the government of the Republic of Cyprus was overthrown by a coup d'itat and on 20 July 1974 the Turkish army intervened on the grounds that such intervention was necessary to protect the Turkish Cypriot community, Turkey invoked art IV of the 1960 Treaty of Guarantee. The United Nations force in Cyprus, with the agreement of the parties, established cease-fire lines forming a buffer zone between the northern and southern parts of the island. Later the Security Council of the United Nations met and expressed its grave concern about the situation and its equal concern 'about the necessity to restore the constitutional structure of the Republic of Cyprus'.

31. In evidence which we accept Mr Polyviou stated that, since 1974, the northern part of Cyprus, which comprises about 35% of the whole of the island, has been under the occupation of Turkish troops and thus outside the control of the government of the republic and that during that time the government of the republic had not exercised control in that area.

32. Between 25 July and 30 July 1974 a conference was held in Geneva of the foreign ministers of the guarantor powers, namely Greece, Turkey and the United Kingdom, who adopted a declaration (the Geneva Declaration) in the following form:

'The Ministers noted the existence in practice in the Republic of Cyprus of two autonomous administrations, that of the Greek Cypriot community and that of the Turkish Cypriot community.'

33. On 1 November 1974 the General Assembly of the United Nations commenced negotiations between the representatives of the two communities and called for them to find a 'mutually political settlement'.

1975 -- The Turkish Federated State of Cyprus

34. In 1975, pursuant to an Exchange of Populations Agreement dated 2 August 1975, Turkish Cypriots moved to the north of the island and Greek Cypriots moved to the south. The buffer zone (or green line as it is sometimes called) divided the two communities and this was monitored by the United Nations.

35. On 13 February 1975 an assembly of the Turkish Cypriot community in Northern Cyprus declared a Turkish Federated State of Cyprus in the area north of the green line. On 8 June 1975 a constitution of the Turkish Federated State of Cyprus, on the pattern of an independent state with a legislature, an

executive and a judiciary, was approved by referendum of the persons living in the territory north of the green line.

36. The legality of the declaration of the Turkish Federated State of Cyprus, made on 13 February 1975, was not accepted by Her Majesty's government which took the view that the Turkish Federated State of Cyprus did not purport to be a state in the international sense and was not recognised as such by any other state.

37. On 28 April 1980 Lord Carrington (the then Foreign Secretary) announced that Her Majesty's government had decided that it would no longer accord recognition to governments but would continue to recognise states in accordance with common international doctrine (see 408 HL Official Report (5th series) cols 1121-1122). In a written answer given on 23 May 1980 Sir Ian Gilmour stated that, when a new regime came to power unconstitutionally, the government's attitude on whether it qualified to be treated as a government would be left to be inferred from the nature of the dealings had with it and, in particular, on whether Her Majesty's government dealt with it on a normal government-to-government basis (see 985 HC Official Report (5th series) written answers col 385). 1983 -- The Turkish Republic of Northern Cyprus

38. On 15 November 1983 an assembly elected by the Turkish Cypriot community unanimously declared that Cyprus north of the green line was an independent state under the name of the Turkish Republic of Northern Cyprus.

39. On 18 November 1983 the United Nations Security Council adopted Resolution 541 which stated that the declaration of independence of 15 November 1983 was incompatible with the 1960 Treaties of Establishment and Guarantee and declared the declaration of independence to be legally invalid. The Security Council called upon all states to respect the sovereignty, independence, territorial integrity and non-alignment of the Republic of Cyprus and not to recognise any Cypriot state other than the Republic of Cyprus.

40. On 11 May 1984 the United Nations Security Council adopted Resolution 550 which re-affirmed Resolution 541 and condemned all secessionist actions, including the purported exchange of ambassadors between Turkey and the Turkish Cypriot leadership, and repeated the call to all states not to recognise the purported state of the Turkish Republic of Northern Cyprus. It further called on all states not to facilitate or assist the 'aforesaid secessionist entity'.

41. Resolutions 541 and 550 were not mandatory as they were not made under Ch VII of the United Nations Charter and neither invoked art 25 of the Charter. Accordingly the resolutions were recommendatory only.

42. On 12 March 1985 the Assembly of the Turkish Republic of Northern Cyprus adopted a constitution, which was approved on 5 May 1985 by referendum of those living in the territory north of the green line. The constitution was formally adopted on 7 May 1985.

The present status of the Republic of Cyprus

43. The government of the Republic of Cyprus is currently headed by President Glafcos Clerides and that government represents the Republic of Cyprus in the United Nations and has diplomatic relations with the governments of most other members of the United Nations, including all the members of the European Union. Her Majesty's government maintains diplomatic relations with, and has normal government-to-government dealings with, the government of the Republic of Cyprus. Ministers from the Republic of Cyprus make official visits to the United Kingdom and are seen by United Kingdom ministers when they do so. The United Kingdom has entered into a number of bilateral agreements with the Republic of Cyprus.

The present status of the Turkish Republic of Northern Cyprus

44. With the exception of Turkey, no other state has recognised the Turkish Republic of Northern Cyprus. On 2 October 1989 the Foreign and Commonwealth Office issued a certificate that the Turkish Republic of Northern Cyprus was not a state for the purposes of Pt I of the State Immunity Act 1978 and Mr Warren-Gash deposed that the terms of that certificate continued to represent the position of Her Majesty's government. Her Majesty's government does not maintain any diplomatic relations with the Turkish Republic of Northern Cyprus. When ministers from the Turkish Republic of Northern Cyprus make visits to the United Kingdom they do so on a private basis and are not seen by United Kingdom ministers.

45. However, since the establishment of the Republic of Cyprus in 1960 Her Majesty's government has had regard to the interests of the Turkish Cypriot community and has maintained contacts with the leaders of the Turkish Cypriot community. These contacts include: contacts by the Customs and Excise concerning value added tax fraud; contacts by the Metropolitan Police concerning the tracing of stolen vehicles and criminal records; contacts by the London Branch of the National Criminal Intelligence Service concerning a missing person; contacts by the Treasury Solicitor with the London office of the Turkish Republic of Northern Cyprus concerning an estate which might have passed to the Crown as bona vacantia; and contact by the Home Office concerning immigration matters.

Part 2 -- The provisions about citizenship

46. By virtue of art 6 and s 2 of Annex D to the Treaty of Establishment, citizenship of the Republic of Cyprus was conferred on any citizen of the United Kingdom and Colonies who had been ordinarily resident in the island of Cyprus at any time in the period of five years immediately before the treaty, and who, inter alia, was born on the island on or after 5 November 1914 or who was descended in male line from such a person. Thus most persons of Cypriot origin automatically became citizens of the Republic of Cyprus and s 3 of Annex D provided that after three months most such persons lost their citizenship of the United Kingdom and Colonies.

47. Article 198 of the 1960 Constitution, which was not a Basic Article, provided that, until citizenship laws were made, the provisions of Annex D to the Treaty of Establishment should apply and that any person born in Cyprus after the date of the treaty should be a citizen of the Republic of Cyprus if on that date his father was a citizen of the republic.

48. In 1967 the Republic of Cyprus Citizenship Law (No 43 of 1967) was passed. This restated to a large extent the provisions of Annex D and art 198 and provided that citizens of the republic were persona who, on the date of the coming into operation of the law, had acquired, or were entitled to acquire, citizenship of the republic under Annex D to the Treaty of Establishment or who thereafter acquired such citizenship under the provisions of the 1967 law. The Law conferred citizenship of the republic on persons born in Cyprus after 16 August 1960 if they were entitled to it by birth or descent. There were subsequent changes to the nationality laws in the republic in 1983 but these did not remove citizenship from those who had acquired it under the treaty, the constitution or the 1967 law.

49. Article 53 of the Constitution of the Turkish Federated State of Cyprus, passed in 1975, provided that citizenship should be acquired 'under the conditions provided by law'.

50. Article 67 of the Constitution of the Turkish Republic of Northern Cyprus, formally adopted on 7 May 1985, provides that all persons who acquired citizenship of the Republic of Cyprus under Annex D to the Treaty of Establishment and who were ordinarily resident in the Turkish Republic of Northern Cyprus on 15 November 1983, or who had acquired citizenship of the Turkish Federated State of Cyprus before 15 November 1983, should be citizens

of the Turkish Republic of Northern Cyprus.

51. At present Turkish Cypriots are admitted to the United Kingdom on the basis that they are citizens of the Republic of Cyprus. Her Majesty's government regards passports issued by the Turkish Republic of Northern Cyprus as no more than evidence of identity and not as constituting recognition of separate nationality. No official United Kingdom stamps are placed in such passports.

Part 3 -- The appellants and their office

52. An office representing the Turkish Cypriot community within the Republic of Cyprus was established in London well before the declaration of the Turkish Federated State of Cyprus on 13 February 1975 and it is within that context that Her Majesty's government allows the office of the Turkish Republic of Northern Cyprus in London to continue to operate. Her Majesty's government does not treat that office as a diplomatic mission nor as representing a foreign state nor does the Foreign and Commonwealth Office accord that office the facilities which it normally extends to diplomatic missions. The Foreign and Commonwealth Office does not deal with the staff as diplomatic agents but only on the basis that they are representatives of the Turkish Cypriot community and accords them no formal status.

53. The Turkish Republic of Northern Cyprus maintains a number of similar offices in other states but these are not accorded the status of diplomatic missions in those states nor are their staff accredited as diplomats under the terms of the Vienna Convention on Diplomatic Relations 1961 (Vienna, 18 April 1961; TS 19 (1965); Cmnd 2565).

54. The appellants consider that the London Office of the Turkish Republic of Northern Cyprus has the status of a mission. Mr Fikri was described as commercial attachi from 1982 to 1985 and head of mission from 1985 to 1990. Mr Caglar succeeded him and was described as head of mission from 7 January 1991 to 7 January 1996. Mr Acarturk was appointed financial attachi in 1986, a post which he still holds. Mr Direkoglu was tourism councillor from 1986 to 1989. Mr Ertugruloglu was first secretary from 1986 to 1991. Mr Genc was press attachi between 1987 and 1992. All employees working in the London Office are paid by the government of the Turkish Republic of Northern Cyprus and their salaries are remitted to London. Tax is deducted at source in Northern Cyprus.

55. On 2 October 1989 the Foreign and Commonwealth Office issued certificates under s 4 of the Diplomatic Privileges Act 1964 certifying that Mr Fikri, Mr Ertugruloglu, Mr Acarturk and Mr Direkoglu had not been notified to the Foreign and Commonwealth Office as members of a diplomatic mission in the United Kingdom. 56. The income of the employees of the London Office of the Turkish Republic of Northern Cyprus was treated by the Revenue as exempt from income tax until 6 February 1987 when the Revenue wrote to Mr Fikri, who was then the head of the London Office, to say that, in the absence of a statutory entitlement to exemption, salaries paid to overseas officials would be subjected to United Kingdom income tax as from February 1987. Thereafter the assessments were issued which are the subject of this appeal.

Issue (1): Whether 'any foreign state' includes an unrecognised foreign state

57. We now turn to consider separately the three issues for determination in the appeal. The first issue is:

'Whether the words "any foreign state" in s 321(2)(b) are to be interpreted so as to include foreign states not recognised by Her Majesty's government, as argued by the appellants, or whether those words mean any foreign state recognised by Her Majesty's government, as argued by the Revenue.'

The submissions of the appellants on the first issue

58. On behalf of the appellants Mr Beloff QC submitted that the words 'any foreign state' in s 321(2)(b) were not confined to foreign states recognised by Her Majesty's government.

59. First, he said that the word 'recognised' did not appear in the subsection and if it were required it would have been included. Words which were not present in the section should not be written in. There was no definition of the phrase 'foreign state' in either the Income and Corporation Taxes Act 1988 or in the Interpretation Act 1978. The Foreign Corporations Act 1991 acknowledged that a state could exist without recognition.

60. Further, the 1988 Act did not provide a definition of the words 'official department or agency of a foreign state' as used in s 321(3) and made no requirement of recognition in that connection either. That absence was significant and was in contrast to the definition of 'official agent of a self-governing colony' (defined by reference to certification by a High Commissioner) in s 320(3)(c) and 'consul' (defined by reference to recognition by Her Majesty) in s 321(3). Neither did the Act use any of the definitions in the Diplomatic Privileges Act 1964 (which incorporated art 1 of the Vienna Convention on Diplomatic Relations 1961), nor the Consular Relations Act 1968. Those Acts used the phrases 'member of the mission', 'diplomatic agent', 'consular officer' or 'consular employee' and provided for exemption from tax under a certificate of the Secretary of State.

61. Mr Beloff accepted that certificates had been issued by the Foreign and Commonwealth Office on 2 October 1989 certifying that the Turkish Republic of Northern Cyprus was not a state for the purposes of Pt I of the State Immunity Act 1978 and that four of the appellants had not been notified as members of a diplomatic mission under s 4 of the Diplomatic Privileges Act 1964. However he submitted that, although certification was conclusive evidence of issues of fact relating to issues of diplomatic or consular privileges, certification was not conclusive as to issues of law. The appellants did not dispute that the certificates given on 2 October 1989 were conclusive as to the fact that the appellants were not entitled to privileges under the Diplomatic Privileges Act 1964 but did submit that the certificates could not be used for a wider purpose to support the conclusion that there was no exemption from income tax under s 321. He cited: R v Governor of Pentonville Prison, ex p Osman (No 2) (1988) 88 ILR 378; Engelke v Musmann [1928] AC 433; R v Secretary of State for the Home Dept, ex p Bagga [1991] 1 QB 485; and Saudi Arabia v Ahmed (EAT/276/93) (8 October 1993, unreported).

62. Mr Beloff contended that the distinction between exemption from tax and immunity from civil process was well established and he submitted that the phrase 'official department or agency of a foreign state' had a distinct meaning and provided for an immunity from taxation wider than the provisions of the 1964 and 1968 Acts. On occasion exemption from tax had been given to a wider class than representatives of a foreign state which enjoyed diplomatic privileges. He cited: R v IRC, ex p Camacq plc [1989] STC 785, [1990] 1 WLR 191; and Fenton Textile Association Ltd v Krassin (1922) 38 TLR 259.

63. Mr Beloff QC argued that recognition was a political act within the sole province of the executive and might depend upon considerations of public policy. Such considerations of public policy should not mean that the appellants were to be deprived of exemption from income tax under the 1988 Act. The Foreign Corporations Act 1991 had encouraged English courts to give effect to private rights regardless of any question of recognition or non-recognition of states. He cited: Re Al-Fin Corp's Patent [1970] Ch 160; Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] QB 205; Spinney's (1948) Ltd v Royal Insurance Ltd [1980] 1 Lloyd's Rep 406; Reel v Holder [1981] 1 WLR 1226; Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769; and Republic of Somalia v Woodhouse Drake & Carey (Suisse) SA, The Mary [1993] QB 54.

64. Mr Beloff further submitted that the exemption in the 1988 Act should not be nullified by the act of the executive exercising its prerogative powers and cited Madras Electric Supply Corp Ltd v Boarland (Inspector of Taxes) [1955] AC 667, 35 TC 612.

65. Mr Beloff QC went on to suggest that, in the absence of statutory provision to the contrary, the phrase 'any foreign state' had to be given its normal and natural meaning. 'Foreign state' was a generic term of international law and the rules of customary international law were incorporated directly into English law. Also, there was a presumption in international law that the meaning of a phrase should follow the evolution of the law. He cited: Trendtex Trading Corp Ltd v Central Bank of Nigeria [1977] QB 529; and Aegean Sea Continental Shelf Case (1978) ICJR 3.

66. As there was no requirement in international law which made recognition a condition of statehood a state could exist without recognition. A state existed where there arose a unit which possessed the criteria of statehood independently of recognition. He cited: Tinoco Arbitration (1923) 1 UN Rep 369; Deutsche Continental Gas-Gesellschaft v Polish State (1929) 5 ILR 11; The Montevideo Convention (1934) 28 AJIL (Supp) 75; Brierly's The Law of Nations (6th edn, 1963) pp 138-139; Brownlie Principles of Public International Law (4th edn, 1990) ch 4 and pp 88-90; Trendtex Trading Corp Ltd v Central Bank of Nigeria [1977] QB 529 at 569; and Oppenheim's International Law (9th edn, 1992) p 198.

67. Finally, Mr Beloff submitted that recognition of a state was declaratory of an existing fact and did not of itself constitute the state. He referred to: The Resolution of the Institut de Droit International of 23 April 1936 on The Recognition of New States and Governments; Brownlie pp 88-89; Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 at 955 per Lord Wilberforce; Colin Warbrick 'The New British Policy on Recognition of Governments' (1981) 30 ICLQ 568-592; and Zaim Necatigil The Cyprus Question and the Turkish Position in International Law (2nd edn, 1993) pp 98-99.

The submissions of the Revenue on the first issue

68. On behalf of the Revenue Mr Henderson QC submitted that the words 'any foreign state' in s 321(2)(b) meant 'any foreign state recognised by Her Majesty's government'.

69. The context of the section was the exemption from income tax of certain official representatives of foreign countries. The section did not contain all the relevant provisions; other provisions were found in the Diplomatic Privileges Act 1964, in the Consular Relations Act 1968 and in ss 320 and 322 of the 1988 Act. Reference had to be made to all those enactments in construing s 321. The Diplomatic Privileges Act 1964 provided that accredited diplomats had to meet a number of conditions before they were entitled to exemption from tax; the head of a mission had to be received and other members of the diplomatic staff had to be notified; s 4 provided that a certificate from the Foreign and Commonwealth Office was conclusive on any question of entitlement under the Act. The Consular Relations Act 1968 had similar provisions. Section 320 of the 1988 Act, which applied to Agents-General of provinces of the Commonwealth, and s 322 which applied to other consular officers, also contained provisions for a certification procedure. Within that framework it was not plausible that Parliament would have intended official agents of unrecognised states to obtain exemption and the intention must have been to confine such exemption to representatives of recognised states.

70. Looking next at the language of the section Mr Henderson pointed out that s 321 applied to consuls and other foreign agents and the definition of consul in s 321(3) expressly required recognition by Her Majesty. Thus a consul under s 321(2)(a) had to belong to a recognised foreign state even though the word 'recognised' was not used. Accordingly the reference in s 321(2)(a) to a foreign state had to be to a recognised foreign state and it followed that the same meaning should apply in s 321(2)(b). The definition of 'official agent' referred to a person who was not a consul but was employed on the staff of a consulate, official department or agency of a foreign state and in that context foreign state must mean recognised foreign state.

71. Mr Henderson accepted that the certificates issued on 2 October 1989 were conclusive only for the purposes of the Acts under which they were issued and also accepted that the absence of diplomatic immunity for the appellants did not mean that s 321 could not apply to them. The Revenue accepted the decisions in R v Governor of Pentonville Prison, ex p Osman (No 2) (1988) 88 ILR 378, Engelke v Musmann [1928] AC 433, R v Secretary of State for the Home Dept, ex p Bagga [1991] 1 QB 485 and Saudi Arabia v Ahmed (EAT 276/93) (8 October 1993, unreported).

72. Mr Henderson pointed out that s 321 had originated in s 20 of the Finance Act 1930 (the 1930 Act) which was the direct statutory antecedent of s 321 of the 1988 Act, having been re-enacted in substantially similar terms in s 462 of the Income Tax Act 1952, s 373 of the Income and Corporation Taxes Act 1970 and then in s 321 of the 1988 Act. In s 17 of the 1930 Act the words 'foreign state' were used within the context of double taxation agreements where it was inevitable that such states would have been recognised. The draftsman would not have given a different meaning to the same words in another section of the same Act.

73. As the words 'any foreign state' in s 321(2)(b) were clear and unambiguous and produced a sensible result no question arose of recourse to Hansard pursuant to the principles laid down in Pepper (Inspector of Taxes) v Hart [1992] STC 898, [1993] AC 593 and Melluish (Inspector of Taxes) v BMI (No 3) Ltd [1995] STC 964 at 978, [1995] 3 WLR 630 at 645. However, if there were any doubt or ambiguity, that was resolved in favour of the construction proposed by the Revenue by recourse to Hansard. Mr Henderson referred to the Official Report of the discussions on cl 17 of the Finance Bill 1930 in committee on 17 June 1930 and in particular to cols 62-64 and the statements of the Chancellor of the Exchequer, Mr Philip Snowden (see 240 HC Official Report (5th series) col 78 and the statements of the Chancellor of the Exchequer and the President of the Board of Trade, Mr William Graham; and col 131 and the statement of the Financial Secretary to the Treasury, Mr Pethick-Lawrence). These statements showed clearly that the purpose of enacting s 20 of the 1930 Act was to give statutory authority for the relief from income tax previously afforded on an extra-statutory basis for the official emoluments of consuls, consul-generals, vice-consuls and consular agents and members of their staff, but to exclude staff members who were British subjects from the relief and that the section was intended to apply only in relation to states recognised by Her Majesty's government.

74. Mr Henderson did not agree that the phrase 'any foreign state' meant a state as defined by international law. Unlike a private agreement a statute was enacted by Parliament on a proposal initiated by the executive and the reference to a state should be presumed to be a reference to a state recognised by the executive. It would not have occurred to anyone when the section was first enacted in 1930 that 'state' meant anything other than a recognised state. In particular it could not have been intended to extend the section to states which the United Kingdom could not recognise because of its treaty obligations or its obligations to the United Nations. The recognition of the Turkish Republic of Northern Cyprus would be a breach of the 1960 Treaty of Guarantee and a breach of the recommendatory resolutions of the United Nations.

75. Mr Henderson submitted that the construction proposed by the Revenue produced a coherent result and meant that the Crown through the executive and the judiciary would speak with one voice and that was desirable as a matter of public policy. He cited Gur Corp v Trust Bank of Africa [1987] QB 599 and also referred to F A Mann Foreign Affairs in English Courts (1986) pp 37-39, 57-62 which he adopted as part of his submissions.

76. Mr Henderson pointed out that, if the appellants were right about the meaning of the section, then the Revenue would have to reach decisions about whether states which were not recognised by Her Majesty's government were states under international law and met the criteria of statehood. There were many such unrecognised countries which would be applying for exemption under s 321(2)(b) and the Revenue had no machinery for ascertaining the status of non-recognised states.

Reasons for our decision on the first issue

77. In considering the submissions of the parties we have found it helpful to consider the matter first as one of statutory construction. Accordingly, we look first at the context of s 321 and the scheme of the legislation which gives exemption from income tax for representatives of foreign states.

The scheme of the legislation

78. Section 1 of the Income and Corporation Taxes Act 1988 provides that income tax shall be charged in respect of profits or gains described or comprised in the schedules set out in ss 15-20. Section 19 describes Sch E as charging tax on the emoluments of any office or employment. There are a number of specific exemptions in the 1988 Act and the exemptions for representatives of foreign states are in ss 320, 321 and 322. However, these sections do not constitute a complete code of exemptions for representatives of foreign states as other exemptions are contained in other Acts. We consider these shortly after we have referred to the position at the time that s 321 was first enacted in 1930.

79. In this connection we have considered the extracts from Hansard containing the debates on the Finance Bill 1930 to which we were referred by Mr Henderson. Mr Philip Snowden, the Chancellor of the Exchequer, explained that the clause sought to give statutory authority to what had been the practice since 1842 (see 240 HC Official Report (5th series) col 62); the Public Accounts Committee had criticised the fact that the relief for consuls was given by Treasury concession and not by statute. The intention was that consuls and others were to get relief from income tax but only upon their official emoluments. However, British nationals employed by the staff of the consulate would not be exempt. (The reference to British nationals in the original clause was changed to Commonwealth citizens in 1948.) The Financial Secretary to the Treasury stated that the clause assumed that a country had been recognised and addressed the tax treatment of the individuals who represented it in consulates in this country (see col 131).

80. Thus the provisions in the Finance Bill 1930 affected only the position of consuls and official agents and not any other representatives of foreign states. The general law of sovereign immunity effectively exempts foreign sovereigns and sovereign states from all taxation in the United Kingdom. The Vienna Convention on Diplomatic Relations (Vienna, 18 April 1961; TS 19 (1965) Cmnd 2565), which was signed in 1961, extended certain of those immunities to ambassadors and their staffs. The Diplomatic Privileges Act 1964 (the 1964 Act) gave the force of law to the provisions of that convention which were set out in Sch 1 to the Act. Section 4 of the 1964 Act provided:

'If in any proceedings any question arises whether or not any person is entitled to any privilege or immunity under this Act, a certificate issued by or under the authority of the Secretary of State stating any fact relating to that question shall be conclusive evidence of that fact.'

81. Article 31 in Sch 1 provides that a diplomatic agent should enjoy immunity from criminal and certain civil jurisdiction. Article 34 provides that a diplomatic agent 'shall be exempt' from a number of taxes which include income tax. Article 37 extends the exemption in art 34 to members of the family of a diplomatic agent and to members of the administrative and technical staff and their families so long as they are not citizens of the United Kingdom. There is also an exemption from tax on the emoluments of members of the staff of a mission who are not citizens of the United Kingdom. Article 1 of Sch 1 contains a number of definitions. The 'head of the mission' is defined as the person charged by the sending state with the duty of acting in that capacity. A 'diplomatic agent' is defined as the head of the mission or member of the diplomatic staff. 'The members of the mission' include the head of the mission and the diplomatic, administrative, technical and domestic staff.

82. It will thus be seen that the exemption from income tax given to a diplomatic agent or other person under the 1964 Act can be verified by a certificate of the secretary of state that the person concerned is entitled to that privilege; such a certificate would only be given if the sending state were recognised by Her Majesty's government.

83. The exemption from income tax to which the head of a mission and members of staff of a mission are entitled under the Diplomatic Privileges Act 1964 is extended to Commonwealth Agents-General and official agents by s 320 of the 1988 Act. That section provides that 'Agents-General', who represent states or provinces of countries within the Commonwealth and 'official agents' for Commonwealth countries or states or provinces in the Commonwealth have to be certified by the High Commissioner of the country or the Agent-General of the state or province in order to obtain the exemption.

84. The Vienna Convention on Consular Relations (Vienna, 24 April 1963; TS 14 (1973) Cmnd 5219) was signed in 1963 and the Consular Relations Act 1968 was enacted to give effect to that convention. Section 1 provided that the provisions set out in Sch 1 (being articles of the Vienna Convention) should have the force of law in the United Kingdom. Section 11 was in the same terms as s 4 of the Diplomatic Privileges Act 1964.

85. Article 1 of Sch 1 contained a number of definitions. 'Consular post' meant any consulate-general, consulate, vice-consulate or consular agency and a 'consular officer' was any person entrusted with the exercise of consular functions. Paragraph 2 of art 1 provided that consular officers were of two categories, namely career consular officers and honorary consular officers. The provisions of ch 2 were to apply to career consular officers and the provisions of ch 3 to honorary consular officers. Chapter 2 contained arts 43 and 49. Article 43 gave career consular officers certain immunity from jurisdiction and art 49 provided that career consular officers and employees 'shall be exempt from' certain taxes including income tax. Chapter 3 contained art 66 which provided that an honorary consular officer should be exempt from tax on the remuneration which he received from the sending state in respect of the exercise of consular functions. 'Consular functions' were defined in art 5 which listed a number of functions and mentioned the protection of the interests of the sending state and its nationals and the development of commercial, economic, cultural and scientific relations between the sending state and the receiving state.

86. Again it will be seen that, if any question arose as to the entitlement to exemption from tax in respect of a consular officer under the 1968 Act, a certificate of the secretary of state was required that the person concerned was entitled to that privilege.

87. To complete the picture we mention s 322 of the 1988 Act which provides exemption for certain consular officers and employees from income tax which would otherwise be charged under Case IV (income arising from securities outside the United Kingdom) or Case V (income arising from possessions outside the United Kingdom) of Sch D or in respect of the income arising from employment as a consular employee. The section only applies to foreign states to which Her Majesty by Order in Council has directed that it should apply for the purpose of giving effect to a consular convention or where there are reciprocal arrangements in that other state.

88. It will be seen that there are a number of provisions, contained in a number of enactments made at different times, and that there is some overlap between them. It is from these that we detect a descending hierarchy of provisions from sovereigns and states at one end to official agents at the other. Sovereigns and sovereign states enjoy immunity under the common law but that would only be granted if their states were recognised. Diplomatic staff enjoy exemption under the Diplomatic Privileges Act 1964 but only if they are certified under s 4 of that Act. Agents-General of states or provinces of countries within the Commonwealth enjoy exemption under s 320 but only if they are certified by the High Commissioner. Consuls and consular officers enjoy exemption under the Consular Privileges Act 1968, or under s 321, or under s 322, but only if they are certified as required by those provisions. Official agents of self-governing colonies enjoy exemption under s 320 but only if they are certified by a High Commissioner. Other official agents enjoy exemption under s 321(2)(b).

89. Within that context it seems to us that the scheme of the legislation is to provide certain exemptions for certain representatives of foreign states. All such representatives, from sovereigns downwards, have to belong either to a recognised state or to be certified in some way. In the light of that framework we have formed the view that the scheme of the legislation is to confine exemption to certain certificated persons or to certain persons from recognised foreign states.

90. Both Mr Fikri and Mr Caglar describe themselves as head of a mission. As such they would be entitled to exemption under the Diplomatic Privileges Act 1964 if their state were recognised. We think it unlikely that Parliament intended to provide for a detailed system of certification and accreditation under the Diplomatic Privileges Act 1964, the Consular Relations Act 1968 and under ss 320 and 322 of the 1988 Act only to allow any person excluded by that process back into the exemption through the words of s 321(2)(b). If s 321(2)(b) were to include official agents of unrecognised foreign states then, in our view, a number of the other provisions for exemption to which we have referred would be superfluous as members of the diplomatic or consular staff of any state could come within the definition of official agents.

91. Mr Beloff drew our attention to the distinction between an exemption from tax and immunity from civil process and cited R v IRC, ex p Camacq Corp [1989] [1996] STC (SCD) 150 STC 785, [1990] 1 WLR 191. Camacq wanted to buy all the shares in a British company and purchased 70% of the total shares. Of the remaining 30%, 20% were held on behalf of the United States Treasury who did not wish to sell at the price offered. A scheme was devised under which the company would declare a dividend which would be paid to the United States Treasury gross, in addition to the purchase price of the shares. The Revenue approved the arrangement but later withdrew their approval on the ground that there was some doubt whether the United States Treasury could claim sovereign immunity. Camacq sought certiorari to quash the decision of the Revenue to revoke their authorisation but its appeal was dismissed on the ground that the Revenue was entitled to revoke. Dillon LJ considered the submissions of the Revenue that sovereign immunity meant no more than immunity from being sued and did not mean immunity from liability to income tax and said that that '[was] a revolutionary reversal of previous practice' and that, although he did not have to decide the point, he was of the view that sovereign immunity did mean immunity from income tax (see [1989] STC 785 at 801-802, [1990] 1 WLR 191 at 200-201).

92. In our view that decision is not of great assistance to us. We do not have to decide the issue of sovereign immunity, nor the issue of diplomatic immunity or exemption, nor the issue of consular exemption. What we have to determine is an exemption for official agents which is either enjoyed as a specific statutory exemption or not at all. STC 785, [1990] 1 WLR 191. Camacq wanted to buy all the shares in a British company and purchased 70% of the total shares. Of the remaining 30%, 20% were held on behalf of the United States Treasury who did not wish to sell at the price offered. A scheme was devised under which the company would declare a dividend which would be paid to the United States Treasury gross, in addition to the purchase price of the shares. The Revenue approved the arrangement but later withdrew their approval on the ground that there was some doubt whether the United States Treasury could claim sovereign immunity. Camacq sought certiorari to quash the decision of the Revenue to revoke their authorisation but its appeal was dismissed on the ground that the Revenue was entitled to revoke. Dillon LJ considered the submissions of the Revenue that sovereign immunity meant no more than immunity from being sued and did not mean immunity from liability to income tax and said that that '[was] a revolutionary reversal of previous practice' and that, although he did not have to decide the point, he was of the view that sovereign immunity did mean immunity from income tax (see [1989] STC 785 at 801-802, [1990] 1 WLR 191 at 200-201).

93. As far as we are aware there are no other statutes, with the possible exception of the Patents Act 1949 which we consider below within the context of the decision in Re Al-Fin Corp's Patent [1970] Ch 160, where the words 'foreign state' mean an unrecognised foreign state. Mr Beloff relied upon the Foreign Corporations Act 1991 to show that a state could exist without recognition. He said that, by defining a 'recognised state' as 'a territory which is recognised by Her Majesty's government in the United Kingdom as a state' the Act acknowledges that a state could exist without recognition. The Foreign Corporations Act 1991 enables the legal capacity of foreign corporations incorporated under the laws of territories which the United Kingdom does not recognise as states to be accepted in this country. Throughout its very short length the Act refers to the unrecognised entities as 'territories' and not as states. It does not refer to them as unrecognised states. In our view that Act confirms the view that Parliament reserves the word 'state' to mean a recognised state and uses another word, in that case 'territory', to refer to an entity which is not a recognised state.

94. Our views on the scheme of the legislation are that the intention of Parliament was to confine the exemption from income tax to official agents of recognised foreign states. However, we have gone on to consider the other submissions made by Mr Beloff to see if they support another view.

The status of the certificates issued by the Foreign and Commonwealth Office

95. We have considered the submissions of Mr Beloff, that the certificates issued by the Foreign and Commonwealth Office on 2 October 1989 were conclusive as to the facts mentioned in them but that they were not conclusive as to any question of law and, in particular, could have no application to the 1988 Act. Mr Henderson accepted that the certificates were conclusive only for the purposes of the Acts under which they were issued. Accordingly, we base our decision about the entitlement of the appellants to the exemption under s 321 not on the existence of those certificates but on the wording of that section.

Exemption given in the past to official agent

96. In support of his contention that s 321(1)(b) gave exemption to official agents of unrecognised foreign states Mr Beloff argued that in the past exemption from tax had been given to representatives of a foreign state who were not recognised as diplomats or consuls and cited Fenton Textile Association Ltd v Krassin (1922) 38 TLR 259. Mr Krassin was sued for the price of goods sold and delivered but claimed that he was the authorised representative of a foreign state and was entitled to immunity from civil process. The Court of Appeal did not consider the extent of the law relating to diplomatic privilege, which at that time rested partly upon statute and partly upon common law, because it concluded that Mr Krassin's position had been defined in an Anglo-Russian Trade Agreement of 16 March 1921 made between His Majesty's government and the Russian Socialistic Federative Soviet Republic. The Soviet government had been recognised as the de facto government of Russia on 16 March 1921 (although it was not recognised de jure until 1924). Under the agreement Mr Krassin was appointed the chief official agent of the Soviet government. The agreement gave some immunities including the same privileges in respect of taxation as were accorded to the official representatives of other foreign governments. However, the agreement gave no immunity from civil process. During argument it was contended by the representatives of Mr Krassin that, as there was then no statutory exemption from tax for official agents, the granting of such exemption denoted an intention that Mr Krassin was entitled to full diplomatic immunity. However, the Court of Appeal held that, as the two governments had agreed as to the precise extent of the immunity given to Mr Krassin, that agreement had to prevail and for that reason Mr Krassin was not immune from suit.

97. Mr Henderson submitted that Krassin's case favoured the views of the Revenue that the exemption in s 321(2)(b) did not apply to official agents of unrecognised foreign states as the exemption in that case was specifically given to a named individual under a special agreement and thus showed that there was no general exemption for such persons.

98. In our view the decision in Krassin's case does not assist Mr Beloff in his argument that Revenue practice has given exemption from tax to a wider class than those entitled to diplomatic privileges and that the modern statutory provisions should be read in its light so as to provide for exemption from tax for official agents of unrecognised states. The decision made it clear that the exemption from tax enjoyed by Mr Krassin rested only on the terms of a specified agreement and not on any wider considerations. There was, and is, no evidence of any wider 'Revenue practice'.

Whether recognition a political act

99. In support of his view that the exemption in s 321(2)(b) was not confined to official agents of recognised states Mr Beloff submitted that recognition was a political act which might depend upon considerations of public policy and said that that feature should not deprive the appellants of their right to exemption from taxation.

100. Mr Beloff relied upon Republic of Somalia v Woodhouse Drake & Carey (Suisse) SA, The Mary [1993] QB 54 to establish that recognition was a political act which might depend upon considerations of public policy. In that case the Republic of Somalia purchased a cargo of rice. When the cargo arrived the government had been overthrown and the cargo could not be discharged. The court ordered that the cargo be sold and the money paid into court. The solicitors acting for the interim government sought payment of the proceeds but the court was not satisfied that the interim government was the government of Somalia. Hobhouse J recalled that since 1980 Her Majesty's government had not recognised governments and went on to identify the criteria that the courts should apply in deciding whether a government was indeed the government of a state. These included whether it was the constitutional government of the state, the degree, nature and stability of administrative control that it exercised over the territory of the state, whether Her Majesty's government had any dealings with it and the nature of such dealings, and, in marginal cases, the extent of its international recognition as the government of the state. He noted that the non-existence of dealings with Her Majesty's government would not be conclusive because the absence could be explained by some extraneous consideration and said that the conduct of governments in their relations with each other could be affected by considerations of policy as well as by considerations of legal characterisation. He ordered the money to stay in court and required the solicitors to obtain authority that they acted for the state.

101. The Republic of Somalia case was concerned only with the recognition of governments and not with the recognition of a state, which is the issue which concerns us. Since 1980 Her Majesty's government has not recognised governments but continues to recognise states. Accordingly, although it will in future be necessary for the courts to consider whether a government is in fact the government of a state, that will not be necessary where a state is concerned as the state will, or will not be, recognised. Also, the Republic of Somalia case concerned rights under a private contract and not rights under a statute, which is what concerns us. We would be prepared to accept that the extent of dealings between governments might depend upon considerations of policy but we do not regard the Republic of Somalia case as authority for the view that recognition of states is governed by matters of policy. However, even if it were, we do not think that that conclusion assists us in interpreting the 1988 Act and in discovering the intention of Parliament as to the meaning of the words in s 321(2)(b).

102. Mr Beloff also referred to the debates in the House of Lords on the Foreign Corporations Bill on 22 April 1991 to support his submission that recognition was a political act (see 528 HL Official Report (5th series) col 68). In introducing the Bill the Lord Advocate (Lord Fraser of Carmyllie) pointed out that it dealt with issues of private international law and ordinary legal relationships. There were indications that the courts were prepared to adopt a realistic attitude and to look, not at whether a territory was a recognised state, but at what actually happened in a country and the law that was in fact applied there. The Bill severed the connection with public international law which dealt with relationships between states so that in future corporations could be recognised even if the state was not, so long as the corporation was recognised by the courts of a settled legal system in the territory in question. The Lord Advocate stressed that the Bill 'did not affect by one iota the Government's policy on the recognition of states' but that, in future, questions of incorporation would not be decided 'by reference to the Government's foreign policy'.

103. In our view this does not assist Mr Beloff because the Bill and the discussion on it was confined to matters of private international law whereas the question of the recognition of a state, with which we are concerned, remains a matter of public international law and was specifically not affected by the Bill.

104. We do not consider that we have to reach a final view on the question whether recognition is, or is not, a political act. Even if it were we do not consider that that would be a relevant factor in construing the words of a taxing statute. If the intention of Parliament is to deny exemption to representatives of unrecognised foreign states the fact that recognition is political would not alter the meaning of the statutory provisions.

Acknowledgement of unrecognised states or governments by the courts

105. Mr Beloff referred us to a number of authorities which, he said, supported the view that the courts had acknowledged the status or capacity of an established government or state entity even where it had not been recognised. The most significant of these authorities is Re Al-Fin Corp's Patent [1970] Ch 160. In that case s 24 of the Patents Act 1949 provided that, if the court was satisfied that a patentee had suffered loss or damage (including loss of opportunity of dealing in or developing the invention) by reason of hostilities between His Majesty and any foreign state, the court could extend the term of the patent. A patentee applied for an extension of a patent under the section on the ground that loss due to the Korean War had created a shortage of nickel which had prevented the exploitation of the invention. It was argued that, as the Democratic People's Republic of Korea (North Korea) was not recognised at the relevant date as a foreign state the loss did not fall within the provisions of s 24. Graham J referred to ss 4 and 30 of the Foreign Enlistment Act 1870 and to ss 1 and 3 of the Reinstatement in Civil Employment Act 1950 and concluded that those two statutes made it clear that there was no general rule which compelled a statute referring to a state to be read in a rigid and narrow sense. The correct principle was that the words must be construed in their context and given the meaning which was intended by the legislature. He concluded that, in the context of s 24, the words 'foreign state' embraced both recognised states and unrecognised states which had a defined territory and an effective government in control of that territory and went on to find that North Korea was a foreign state within the meaning of the section.

106. Mr Henderson QC distinguished the decision in Al-fin's case and pointed out that Graham J had emphasised that the words must be construed in their context and given the meaning intended by the legislature. In that case the issue concerned the private rights of the patentee and the decision had no effect on the foreign entity. That was the only decision where the courts had held that the words 'foreign state' could mean an unrecognised foreign state. In F A Mann Foreign Affairs in English Courts (1986) p 60 Dr Mann disapproved of that decision and expressed the view that if Parliament had intended the Act to apply to an unrecognised state it would have referred to 'any foreign entity calling itself a state.'

107. We have referred to the two other statutes relied upon by Graham J to see if they can be of assistance to us in construing s 321. Section 4 of the Foreign Enlistment Act 1870 provides that if any person accepts a commission or engagement in the military or naval service of 'any foreign state' at war with Her Majesty he should be guilty of an offence. Section 30 of the same Act defines 'foreign state' for the purposes of the Act as including 'any foreign prince, colony, province, or part of any province or people, or any person or persons exercising or assuming to exercise the powers of government in or over any foreign country, colony, province, or part of any province or people.' From this it appears that, as the Act contained a specific definition of 'foreign state', it was thought that the normal meaning was not deemed appropriate for the special purposes of that Act. That would support the view that the normal meaning of 'foreign state' is 'recognised foreign state'. The Reinstatement in Civil Employment Act 1950 made provision for the reinstatement in civil employment of persons who had served whole-time in the armed forces and s 1 made provision for the reinstatement rights of reserves and persons enlisting for service in Korea. Korea was referred to by name but not as 'a foreign state'.

108. In our view Al-fin's case is the authority which most assists Mr Beloff as it deals with the rights of a private person under a statute. Also, as a decision of the High Court it is binding on us. We have, therefore, adopted the principle enunciated by Graham J of construing the words 'any foreign state' in their context and giving them the meaning intended by the legislature. In the context of the Patents Act 1949 Graham J concluded that the words embraced both recognised and unrecognised states but in the context of s 321, and within the framework of the provisions which give exemption from income tax for representatives of foreign states, we have concluded that, for the reasons we have already mentioned, it was the intention of the legislature that the words 'any foreign state' should mean any foreign state recognised by Her Majesty's government.

109. The other authorities relied upon by Mr Beloff in this connection were Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] QB 205; Spinney's (1948) Ltd v Royal Insurance Co Ltd [1980] 1 Lloyd's Rep 406; Reel v Holder [1981] 1 WLR 1226; and Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769.

110. In the Hesperides Hotels case hotels in Northern Cyprus owned by two companies registered in the Republic of Cyprus were taken over and occupied after the Turkish invasion of 1974. The owners issued proceedings against the London representative of the Turkish Federated State of Cyprus claiming damages and an injunction restraining further trespass to the hotels. The injunction was granted and the London representative appealed. In his decision Lord Denning MR reviewed the authorities in favour of the view that if a state were not recognised by Her Majesty's government the courts of this country could not give effect to the acts or laws of that state on the ground that the executive and the courts should speak with one voice; these authorities included Aksionairnoye Obschestvo A M Luther v James Sagor & Co [1921] 3 KB 532; Carl Zeiss Stiftung v Rayner & Keeler (No 2) [1967] 1 AC 853; Lauterpacht Recognition in International Law (1947); and The Arantzazu Mendi [1939] AC 256. He also reviewed the authorities in favour of the other view, which was that the executive is concerned with the external consequences of recognition vis-a-vis other states whereas the courts were concerned with the internal consequences of it vis-a-vis private individuals; and that the courts were entitled to look at the state of affairs actually existing in a territory to see what law was in fact effective and enforced in that territory and to give effect to it in its impact on individuals as justice and common sense required. Lord Denning MR concluded that if he had to make a choice he would unhesitatingly hold that the courts could recognise the laws or acts of a body which was in effective control even though it had not been recognised by Her Majesty's government 'at any rate in regard to the laws which regulate the day to day affairs of the people' (see [1978] QB 205 at 218). In the event that issue was not decided because the Court of Appeal discharged the injunction on the ground that an English court had no jurisdiction to grant relief against trespass to immovables situated out of England. Roskill LJ remarked that it was undesirable to make any observations upon the difficult question of private international law (namely whether the courts would give effect to the laws or acts of a body in effective control of a place but which had not been recognised) which did not arise for decision.

111. The dicta of Lord Denning MR in the Hesperides case were obiter but they are in line with previous decisions (and with the debates on the Foreign Corporations Bill), which held that the courts could acknowledge the existence of an unrecognised foreign state in the context of the enforcement of foreign laws where the issue was the commercial obligations between persons or 'the laws which regulate the day to day affairs of the people'. We do not have to enforce foreign laws in the context of a commercial dispute between persons, nor in the context of day-to-day personal affairs, but are concerned with finding the intention of Parliament in enacting a statute which regulates the statutory obligations of individuals bearing in mind that legislation is proposed by the executive which is concerned with the external consequence of recognition vis-a-vis other states.

112. In the Spinney's case the plaintiffs, who owned property in Beirut. Lebanon, took out insurance with the defendants. The policy provided that it did not cover loss or damage occasioned by civil war or civil commotion. The plaintiffs suffered loss but the defendants refused the claim on the ground that the loss had been occasioned by civil war. Mustill J considered whether the court should ask the Secretary of State for Foreign Affairs for a certificate as to the position in Lebanon at the relevant time but declined to do so as such certificates were only appropriate where the state of the United Kingdom's diplomatic relations formed an integral part of the issue in the suit. The issue was not whether there was a civil war in the public international law sense but whether there was a civil war within the meaning of the policy.

113. We note that this authority was not concerned with the existence of states but with the existence of wars. Also, we are not concerned with the construction of a commercial document between persons but with a statute which regulates the obligations of an individual as against the government of the United Kingdom.

114. In Reel v Holder the Track and Field Association of Taiwan (formerly Formosa) brought proceedings against the International Amateur Athletic Federation who had excluded the association from membership on the ground that the federation's rules provided that 'only one member for each country' could be affiliated and the Athletic Association of mainland China was a member. It was accepted that Taiwan had not been recognised as a state by Her Majesty's government. In his decision Lord Denning MR said ([1981] 1 WLR 1226 at 1230) -- '. . . we are not concerned with international law or with sovereignty. We are simply concerned with the interpretation of the rules of the federation.'

115. Relying on the fact that the rules permitted colonies to be members, thus showing that membership was not confined to sovereign states in the international sense, and also on the fact that the rules mentioned 'country', he held that Taiwan could be admitted to membership and the decision to exclude that country had been wrongly made.

116. This decision concerns a contractual relationship based on private rules which were specifically not restricted to sovereign states; also, the decision depended upon the construction of the different word 'country' and not state.

117. In the Polly Peck case the administrators of the company of that name were granted a Mareva injunction against the Central Bank of the Turkish Republic of Northern Cyprus. The issue in the appeal was whether the Mareva injunction should be lifted and the Court of Appeal decided that it should. In his decision Scott LJ stated that Northern Cyprus was not recognised by Her Majesty's government but none the less had had de facto control over its territory since about 1974.

118. We do not dispute that finding but do not find it of great relevance in the present appeal. The Polly Peck decision confirms the view outlined in the debates on the Foreign Corporations Bill that courts are willing to look at the facts where commercial issues between individuals are concerned. As we have said we do not consider that that principle can be extended to the interpretation of the statutory provisions with which we are concerned.

119. Having considered the authorities cited to us by Mr Beloff we now consider Gur Corp v Trust Bank of Africa Ltd [1987] QB 599 which was relied upon by Mr Henderson. In that case the corporation contracted to erect buildings for the Department of Public Works in Ciskei and the bank gave a guarantee to Ciskei in return for a payment. Ciskei demanded payment under the guarantee and the question was raised as to whether Ciskei had locus standi to sue or be sued in the English courts. The Court of Appeal held that certificates from the Foreign Office were conclusive that the Republic of Ciskei was not recognised as an independent state and it was not open to the courts to hold that it was in law capable of an executive, legal or administrative act; however the Republic of South Africa had delegated its power to Ciskei and, in the capacity of a subordinate body set up by the republic. Ciskei did have locus standi to act on behalf of the republic. In holding that the Foreign Office certificates were conclusive Steyn J said (at 604):

'The reason underlying this rule is that in the field of foreign relations the Crown in its executive and judicial functions ought to speak with one voice, and that the recognition of a foreign state or government is a matter of foreign policy on which the executive is in a markedly superior position to form a judgment.'

120. Sir John Donaldson MR (at 620) also referred to --

'. . . the basic public policy constraint that the courts cannot take cognizance of a foreign juridical person, if to do so would involve them in acting inconsistently with the foreign policy or diplomatic stance of this country.'

although he added that it might be possible, where no consideration of public policy to the contrary had to prevail, to take cognisance of private rights or perfunctory acts of administration including the registration of marriages and births and matters of private law as between individuals (see at 622).

121. The principle we extract from these authorities is that the courts may acknowledge the existence of an unrecognised foreign government in the context of the enforcement of laws relating to commercial obligations or matters of private law between individuals or matters of routine administration such as the registration of births, marriages or deaths. This principle is in line with that adopted in the Foreign Corporations Act 1991. However, the courts will not acknowledge the existence of an unrecognised state if to do so would involve them in acting inconsistently with the foreign policy or diplomatic stance of this country.

122. We are not concerned with commercial obligations or matters of private law or matters of administration but with the construction of an Act of the United Kingdom Parliament. In our view it is a matter of basic public policy

that we should not take cognisance of the Turkish Republic of Northern Cyprus as that would involve us in acting inconsistently with the foreign policy and diplomatic stance of this country.

Whether statutory exemption could be overridden by prerogative powers

123. Mr Beloff submitted that where a taxing statute contained an exemption for a foreign state such exemption could not be nullified by an act of the executive in exercise of its prerogative powers, citing Madras Electric Supply Corp Ltd v Boarland (Inspector of Taxes) [1955] AC 667, 35 TC 612. Mr Henderson submitted that the present appeal was not a case of the use of the prerogative powers.

124. In the Madras and Electric Supply case r 11(2) of the Rules Applicable to Cases I and II of Sch D to the Income Tax Act 1918 provided that where a person succeeded to a trade which had been carried on by another person that was treated as a discontinuance of the trade and the commencement of a new trade. In 1947 the undertaking, plant and machinery of a company in India was purchased by the Madras government acting as a branch of the Crown. The company was assessed to a balancing charge on the sale of its plant and machinery. The company argued that the Crown was not a person within the meaning of the Taxes Acts, as it was immune from tax, and so the provisions of r 11(2) did not apply. The Revenue argued that the Crown was in principle chargeable to tax but obtained immunity by the prerogative right. The House of Lords held that it was unnecessary to decide that issue as it could not have been intended that the tax position of a trader, and his liability to pay a balancing charge, should depend on whether his business was taken over by the Crown or by any other person. In r 11(2), therefore, the word 'person' included the Crown by necessary implication.

125. We do not consider that decision to be authority for the view that the executive cannot prevent the application of a taxing statute by the use of the prerogative powers. The decision was confined to the liability of the trading company and not of the Crown and the issue of the prerogative was not decided. We are prepared to accept that the Crown has no immunity from tax where a statute expressly provides for a liability but we do not regard that point as relevant in the present appeal where the Revenue are seeking to tax the appellants under the words of the 1988 Act and not under the prerogative power. We are also prepared to accept that the prerogative cannot narrow the scope of a specific statutory exemption from an individual's obligation to pay tax but in the present appeal we are concerned to find whether there is an exemption, not whether it can be nullified by the use of the prerogative powers.

The meaning of 'foreign state' by reference to international law

126. In further support of his argument that the words 'foreign state' included an unrecognised foreign state Mr Beloff argued that the phrase 'foreign state' was a generic term of international law which was incorporated directly into English law and the meaning of which evolved with the evolution of the law, citing Trendtex Trading Corp Ltd v Central Bank of Nigeria [1977] QB 529 and The Aegean Sea Continental Shelf Case (Greece and Turkey) (1978) ICJR 3.

127. Before considering these authorities we have reminded ourselves of the sources of international law. These are summarised in Brownlie Principles of Public International Law (4th edn, 1990) p 3 by reference to art 38 of the Statute of the International Court of Justice (San Francisco, 26 June 1945; RS 67 (1946); Cmd 7015). That statute provides that that court should apply: international conventions establishing rules expressly recognised by the contesting states, international custom, the general principles of law recognised by civilised nations, judicial decisions, and the teachings of the most highly qualified publicists. The same sources were mentioned by Stephenson LJ in the Trendtex case [1977] QB 529 at 569 where he followed Compania Naviera Vascongada v SS Cristina [1938] AC 485 and said that the rules of international law were proved in the English courts by taking judicial notice of international treaties and conventions, authoritative textbooks, practice and judicial decisions of courts in other countries.

128. Brownlie also states that international conventions and international custom are obviously the important sources of international law and the priority of the first is explicable by the fact that it refers to a source of mutual obligations by the parties.

129. We agree and, within the context of this appeal, we have to bear in mind that the Treaties of Accession and Guarantee of 1960 are a primary source of obligations by the parties to those treaties, namely the United Kingdom, Greece, Turkey, the Greek Cypriot community and the Turkish Cypriot community. We are a court of the United Kingdom and must recognise the priority of the United Kingdom's treaty obligations. Bearing that in mind we consider the authorities about customary international law cited by Mr Beloff.

The incorporation of international law into English law

130. Mr Beloff argued that the rules of customary international law were incorporated directly into English law and cited the Trendtex case [1977] QB 529. The Central Bank of Nigeria was incorporated by Nigerian statute as a central bank and issued a letter of credit on which it later declined to make payments. The Court of Appeal held that the bank was not a department of state and not entitled to immunity and that, in any event, international law no longer recognised immunity from suit for a government department in respect of commercial transactions. In his decision Lord Denning MR considered whether international law was incorporated in, and automatically became part of, English law or whether international law should not be considered to be part of English law unless it had been adopted by statute, decisions of the judges or long-established custom. As the rules of international law changed, and as the courts gave effect to those changes, it followed that international law, as it existed from time to time, formed part of English law. If international law changed then the court could give effect to that change even though that meant reversing a previous decision. Shaw LJ held that, as international law was part of the law of England the latter should not preserve 'in a sort of judicial aspic' precepts discarded outside England by other civilised states (see at 579).

131. We accept that international law, as it exists from time to time, is incorporated into English law. However, within the context of this decision, we are concerned not only with the principles of customary international law but also with the provisions of the 1960 treaties to which the United Kingdom was a party.

132. Mr Beloff also argued that the meaning of any concept in international law should follow the evolution of the law and relied upon the Aegean Sea Continental Shelf Case (Greece and Turkey) (1978) ICJR 3. Greece and Turkey were parties to an international treaty known as the 1928 General Act for the Pacific Settlement of International Disputes (Geneva, 26 September 1928; TS 32 (1931); Cmd 3930) under which the parties agreed to submit disputes to judicial settlement. In its instrument of accession to the treaty in 1931 Greece reserved any 'disputes relating to territorial status'. Greece then asked the International Court of Justice to resolve a dispute about continental shelf rights which it claimed by virtue of its sovereignty over certain islands in the Aegean Sea saying that, as the idea of a continental shelf was unknown when Greece acceded to the treaty, its reservations as to territorial status could not apply to it. The International Court held that the 1928 Act was designed to be of continuing duration and so the provisions of the Act, and also of the concept of territorial status in the reservation, should follow the evolution of the law and correspond with the meaning attached to the concept by the law in force at any given time.

133. As this was a decision given on the specific provisions of the 1928 treaty and the 1931 reservation it does not seem to us to have been enunciated as a general principle of customary international law. Nevertheless, on the authority of the Trendtex case we accept that we should give effect to the rules of international law as they change from time to time.

Whether recognition a requirement of a state in international law

134. In support of his argument that a 'foreign state' in international law could exist independently of recognition Mr Beloff referred to Brownlie pp 88-89 and, in particular, to the discussion of Tinoco Arbitration (1923) 1 UN Rep 369. In that case Great Britain was allowed to bring a claim on the basis of concessions granted by a revolutionary government of Costa Rica which had not been recognised by some other states, including Great Britain. The arbitrator, Mr William H Taft, said that non-recognition of a government was usually appropriate evidence that it had not attained the independence and control entitling it by international law to be classed as a national personality. However, he went on to say that if non-recognition were determined not by control but by illegitimacy or irregularity of origin then the lack of recognition lost some of its evidential weight. He held that non-recognition of the revolutionary government could not outweigh the evidence disclosed to him about the de facto character of the government according to the standards set by international law.

`135. This decision adopts a view similar to that in private international law which was later adopted by Lord Denning MR in the Hesperides case [1978] QB 205 at 218, namely that in considering commercial disputes or 'the day to day affairs of the people' the courts could recognise the laws of a body in effective control even if not recognised. We note that the arbitration was concerned with the recognition of a government and not of a state. In considering this case we have also considered the context in which it is discussed in Brownlie. The context is part of the discussion of the declaratory view of recognition and the case lends support to the argument that an international tribunal could accept the existence of a state even though one of the parties to the proceedings did not do so. We are not an international tribunal but a domestic court of the United Kingdom and we are not determining a dispute between two states but between six individuals and the Revenue. We are interpreting domestic tax law and are concerned to find the intention of the United Kingdom Parliament in formulating that legislation. Within that context we do not find that Tinoco Arbitration gives us authority to ignore the United Kingdom's treaty obligations nor the fact that the United Kingdom has not recognised the Turkish Republic of Northern Cyprus.

136. Mr Beloff also relied upon art 3 of the Convention on the Rights and Duties of States (Montevideo, 26 December 1933; US TS 881; (1934) 28 AJIL Supp 75) agreed at the Seventh International Conference of American States held at Montevideo in December 1933 (the Montevideo Convention). Article 3 of that convention provides that the political existence of a state is independent of recognition by other states and that, even before recognition, a state had the right to defend its integrity and independence.

137. The United Kingdom was not a party to that convention and Brownlie p 12 says that conventions and treaties are, in principle, only binding on the parties to them, although the explicit acceptance of rules of law in a treaty and the declaratory nature of its provisions might support a customary rule. We do not, therefore, find that convention of assistance in the present appeal of the parties to the proceedings did not do so. We are not an international tribunal but a domestic court of the United Kingdom and we are not determining a dispute between two states but between six individuals and the Revenue. We are interpreting domestic tax law and are concerned to find the intention of the United Kingdom Parliament in formulating that legislation. Within that context we do not find that Tinoco Arbitration gives us authority to ignore the United Kingdom's treaty obligations nor the fact that the United Kingdom has not recognised the Turkish Republic of Northern Cyprus.

138. Mr Beloff also relied upon Deutsche Continental Gas-Gesellschaft v Polish State (1929) 5 ILR 11. Article 297 of the Treaty of Versailles (Treaty of Peace with Germany; Versailles, 28 June 1919; TS 4 (1919); Cmd 153), which came into force on 10 January 1920, provided that the Allied Powers reserved the right to liquidate all property belonging to German nationals within their territories, including territories ceded to them by the treaty. In 1923 Poland ordered the liquidation of property owned by the plaintiff in Warsaw. The plaintiff sought redress on the ground that the liquidation was inconsistent with the Treaty of Versailles; the intention of the treaty was to restrict the right of liquidation to territories ceded by Germany and at the time of the liquidation Warsaw belonged in law to Russia who had not then ceded it to Poland. The Germano-Polish Mixed Arbitral Tribunal held that, at the time of the treaty, Poland existed as a state exercising sovereignty over the Russian and Austrian parts of Poland; in 1919 it was recognised by a number of powers and the absence of recognition by Russia did not mean that recognition had to be withheld from Poland. The signing of the Treaty of Peace on 28 June 1919 by Germany and Poland implied full recognition and express recognition was contained in art 87 of the treaty. The High Contracting Parties must have known that Warsaw formed part of Polish territory and so Poland had the right to liquidate given by art 297.

139. In our view this decision was given on its own facts and we cannot discern a general principle that a state can exist without recognition. Also the arbitral tribunal was concerned with the examination of the provisions of a treaty rather than with the principles of customary international law. Also, the tribunal found that Poland had been recognised.

140. Mr Beloff also relied upon Brierly's The Law of Nations (6th edn, 1963) p 139 where the author says:

'A state may exist without being recognized, and if it does exist in fact, then, whether or not it has been formally recognized by other states, it has the right to be treated by them as a state. The primary function of recognition is to acknowledge as a fact something which has hitherto been uncertain, namely the independence of the body claiming to be a state . . .'

141. We accept that recognition acknowledges as a fact the independence of a body claiming to be a state but from that it appears to follow that a state which has not recognised an emerging entity has not acknowledged it to be a state. That would appear to point towards the conclusion that, in referring to a foreign state in s 321, the intention of the United Kingdom Parliament was to exclude an entity which Her Majesty's government had not acknowledged to be a state by recognition.

Whether recognition declaratory or constitutive

142. Finally, Mr Beloff submitted that recognition did not constitute the existence of a state (i e was not constitutive) but declared that it already existed (i e was declaratory). He relied upon a resolution passed by the Institut de Droit International on 23 April 1936 (on the Recognition of New States and Governments) which said:

'La reconnaissance d'un Etat nouveau est l'acte libre par lequel un ou plusieurs Etats constatent l'existence sur un territoire ditermini d'une sociiti humaine politiquement organisie, indipendante de tout autre Etat existant, capable d'observer les prescriptions du droit international et manifestent en consiquence leur volonti de la considirer comme membre de la Communauti internationale.

La reconnaissance a un effet diclaritif.

L'existence de l'Etat nouveau avec tous les effets juridiques qui s'attachent 'cette existence n'est pas affectie par le refus de reconnaissance d'un ou plusieurs Etats.'

143. Mr Beloff also relied on Colin Warbrick 'The New British Policy on Recognition of Governments' (1981) 30 ICLQ 568. That article points out that there are significant differences between the recognition of states and the recognition of governments and that, although a state could be recognised without a government, a government could not be recognised without recognising the state. Mr Warbrick accepts that the criteria of statehood are laid down by international law and that 'recognition of a state is the acknowledgement of the claim to the powers of statehood'. The legal personality of a state depends upon the existence of the legal criteria and is not derived from recognition by other states. He states (at pp 568-569):

'Recognition is the acknowledgement by the recognising State that the recognised entity satisfies these criteria. This acknowledgement cannot be compelled but is subject to legal constraint for it is an unlawful act to recognise as a State an entity which does not comply with the legal standards.' The article also points out the difference between the recognition of a state (or a government) and the maintenance of diplomatic relations. Normally recognition is accompanied by the exchange of diplomatic missions and, indeed, the opening of diplomatic relations is one of the few objective acts from which recognition can be implied. However, the severance of diplomatic relations does not mean the withdrawal of recognition. Recognition may be compelling evidence that the state exists but the absence of recognition does not mean that the court cannot look at all the facts and see if the state does exist.

144. Whatever the force of these arguments in the international sphere, and whatever their application by an international court or tribunal, we are faced with the fact that the United Kingdom government has not recognised the Turkish Republic of Northern Cyprus. In the words of Mr Warbrick, it has not 'acknowledged the claim to the powers of statehood'. Accordingly, in interpreting legislation made by the United Kingdom Parliament, we should have regard to the fact that the United Kingdom has not yet acknowledged that the Turkish Republic of Northern Cyprus has satisfied the criteria of statehood.

145. We have also considered the passage in Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 at 955 referred to by Mr Beloff where Lord Wilberforce said:

'The classic cases of non-recognition of governments arise in two types of situation: first, where some new state comes into existence, as by separation from another state or states (in such a case there may be a question of non-recognition of the state itself as well as of the government); instances of this are cases concerned with breakaway Spanish colonies . . . and numerous cases relating to Russian banks.'

146. Mr Beloff submitted that this passage was authority for the view that a state could exist before recognition. However, Lord Wilberforce was here speaking of the non-recognition of governments and his remarks about the non-recognition of states were obiter.

147. Our conclusions on the suggestion that recognition is declaratory of the existence of a state, but does not constitute the existence of a state, is that this may well be the case as a matter of international law. Although it could always be said that a recognised state is a state, it could not always be said that an unrecognised entity is a state and it would still be necessary to consider whether the entity satisfied the requirements of statehood. Here, however, we have to interpret domestic legislation and find the meaning of 'state' within that context. As states which are not recognised by Her Majesty's government are states which the United Kingdom has not acknowledged have the powers of statehood, we are of the view that, in the context of s 321, 'state' means a state recognised by Her Majesty's government.

Conclusion on the first issue

148. Our views on the first issue in the appeal are that, within the context of the 1988 Act, and within the whole scheme of immunities and exemptions for representatives of foreign states, it was not the intention of Parliament to introduce, in a paragraph of a subsection a new exemption for representatives of unrecognised foreign states when all the other immunities and exemptions were specifically dependent on recognition or certification; if it had been the intention of Parliament to introduce a new concept in a paragraph of a subsection it would have stated so specifically. We accept a number of the submissions made by Mr Beloff about the concept of recognition in customary international law but remind ourselves that the position in Cyprus is regulated by two treaties made in 1960 to which the United Kingdom was a party and also by the Cyprus Act 1960 which is still in force. In our view none of the submissions made by Mr Beloff justifies us in departing from the provisions of those treaties, nor from the provisions of the Cyprus Act 1960.

149. We therefore conclude that the words 'any foreign state' in s 321(2)(b) mean any foreign state recognised by Her Majesty's government.

150. No detailed submissions were made to us about the Cyprus Act 1960 but, in our view, the provisions of that Act are relevant to this appeal. Section 2(1) of the Act provides that the Republic of Cyprus shall comprise the entirety of the island of Cyprus with the exception of the two sovereign base areas. Leaving aside the 1988 Act, and looking only at the provisions of the Cyprus Act 1960, there is a current statutory provision in the United Kingdom that the only state on the island of Cyprus is the Republic of Cyprus. In the light of that provision it would be contrary to domestic statute law to hold that the Turkish Republic of Northern Cyprus is a foreign state and from that it would follow that the appellants, who are its representatives, cannot be entitled to the exemption in s 321.

151. Our conclusion on the first issue means that we do not have to consider the other two issues in the appeal but, in case we are wrong in our conclusion on the first issue, and as submissions were made on the other issues, we have gone on to consider them.

Issue (2): Whether Turkish Republic of Northern Cyprus an unrecognised foreign state

152. The second issue for determination in the appeal is:

'If the words "any foreign state" in s 321(2)(b) include states not recognised by Her Majesty's government, whether the Turkish Republic of Northern Cyprus is a foreign state, as contended by the appellants, or whether it fails to meet all the requirements of a state as contended by the Revenue.'

The submissions of the appellants on the second issue

153. On behalf of the appellants Mr Beloff submitted that the Turkish Republic of Northern Cyprus was an unrecognised foreign state because it met all the criteria of statehood. A state was in existence when a people were settled in a defined territory under its own sovereign government. He cited Texas v White (1868) 74 US (7 Wallace) 700. Thus international law required a population, a defined territory, a stable government and independence or sovereignty. He cited: The Montevideo Convention (1933); Brownlie Principles of Public International Law (4th edn, 1990) pp 72-74; and Oppenheim's International Law (9th edn, 1992) pp 120-123.

154. These criteria were also recognised by the British government as the criteria for the recognition of a state.

155. As far as the first three requirements were concerned the evidence supported the view that there was a population of Turkish Cypriots in the north of the island of Cyprus. The territory had been defined in 1974 by the green line or buffer zone. The borders were not disputed but, even if they were, disputed borders did not prevent a territory from constituting a state. He cited Deutsche Continental Gas-Gesellschaft v Polish State (1929) 5 ILR 11 and J G Starke Introduction to International Law (10th edn, 1989) p 95. There was an established, well-developed, democratic government, with a constitution and judiciary, in the north of the island. That was the only authority which performed governmental functions in the north of the island as the government of the south did not exercise any authority in the north.

156. As far as the fourth requirement of independence and sovereignty was concerned whereas the Montevideo Convention equated the concept of independence with the capacity to enter into relations with other states. Oppenheim's International Law (9th edn, 1992) p 122 addressed the issue of sovereignty rather than independence and defined sovereignty as supreme authority which implied independence within and without the borders of the country. The evidence of Mr Caglar and Mr Necatigil supported the view that the government of the Turkish Republic of Northern Cyprus had such independence and sovereignty as it had a constitution which had established a legislature, an executive and a judiciary.

157. Mr Beloff referred to an opinion dated 20 July 1990 on the legal status in international law of the Turkish Cypriot and the Greek Cypriot communities in Cyprus prepared by Mr Monroe Leigh who was the legal adviser to the State Department in the United States. He also referred to an opinion dated 31 May 1991 on certain questions regarding sovereignty in Cyprus given by Professor Eli Lauterpacht QC and Mr Monroe Leigh for the United Nations and to arts 90 and 91 of the Constitution of the Turkish Republic of Northern Cyprus. There was no evidence of dependence in international relations and R v Minister of Agriculture Fisheries and Food, ex p S P Anastasiou (Pissouri) Ltd (Case C-432/92) [1994] ECR I-3087 showed that the Turkish Republic of Northern Cyprus would deal with other states where they would deal with it. The attitude of Her Majesty's government to the real situation in the Turkish Republic of Northern Cyprus should be inferred from its day-to-day dealings rather than from the formal diplomatic situation. The day-to-day dealings between the United Kingdom government and the government of the Turkish Republic of Northern Cyprus were in the nature of government-to-government dealings between the executive branches of two sovereign entities.

158. As the Turkish Republic of Northern Cyprus met all four criteria of statehood it was, therefore, an unrecognised foreign state.

159. Mr Beloff concluded his submissions on the second issue by saying that the purpose of the exemption in s 321 was to facilitate contacts between representatives of foreign states and that, irrespective of recognition, it was in the interests of Her Majesty's government to maintain official contacts with the Turkish Republic of Northern Cyprus and to keep open the lines of contacts in the interests of the peoples.

The submissions of the Revenue on the second issue

160. On behalf of the Revenue Dr Greenwood agreed that the criteria for statehood were: a clearly defined territory, a population, a government in control of the territory and independence in external relations. He cited Oppenheim's International Law (9th edn, 1992) p 122.

161. The Revenue accepted that the Turkish Republic of Northern Cyprus had a clearly defined territory, a population and an administration which in practice exercised control in the area north of the green line but did not accept that the Turkish Republic of Northern Cyprus exercised sovereignty over that territory as, in the view of the Revenue the Republic of Cyprus exercised sovereignty over the whole island. The fourth criteria was described in the Montevideo Convention as the capacity to enter into external relations. He also cited: Brownlie Principles of Public International Law (4th edn, 1990) pp 72-74. The fact that the Turkish Republic of Northern Cyprus could not enter into relations with any country other than Turkey meant that it did not meet the fourth criteria of statehood. He cited Oppenheim's International Law (9th edn, 1992) p 130 and Dugard International Law: A South African Perspective (1994) pp 60-64.

162. Dr Greenwood submitted that the contacts between the Turkish Republic of Northern Cyprus and Her Majesty's government fell short of government-to-government dealings as appeared from the affidavit of Mr Warren-Gash. He cited the Anastasiou case.

163. Dr Greenwood also submitted that, as recognition was an acknowledgement by other states that the criteria of statehood had been met, the absence of recognition was important evidence that the criteria had not been met. He cited Oppenheim's International Law (9th edn, 1992) p 130. The absence of recognition by any state other than Turkey was evidence of the fact that the Turkish Republic of Northern Cyprus had failed to meet the criteria of statehood. The Revenue accepted that Resolutions 541 and 550 of the United Nations were not legally binding but they were persuasive authoritative expressions of the view that the Turkish Republic of Northern Cyprus was not a state and thus evidence that it did not meet the criteria of statehood.

Reasons for our decision on the second issue -- The criteria of statehood

164. The parties were agreed that there were four criteria of statehood and that the Turkish Republic of Northern Cyprus met the first three, namely a population, a defined territory and a government in control of that territory. From the evidence before us we accept that in Northern Cyprus there is a population which has established a stable political community which has existed for many years and this was recognised in the Hesperides case [1978] 1 QB 205. The green line defines the territory of Northern Cyprus and is readily identifiable. We also accept the evidence of Mr Necatigil, which was not disputed, that there is a constitution and a central administration with a legislature and a judiciary. Polly Peck International plc v Nadir (No 2) [1994] 4 All ER 769 indicates that there is a central bank.

The fourth requirement: independence or sovereignty

165. However, there was some difference of view on the exact nature of the fourth requirement. Brownlie p 73 refers to art 1 of the Montevideo Convention and mentions the fourth requirement as the capacity to enter into relations with other states. Oppenheim's International Law (9th edn, 1992) p 122 refers to sovereignty which he defines as legal authority which is not in law dependent on any other earthly authority and which implies 'independence all round, within and without the borders of the country'. The criteria adopted by the British government are described in a written answer given by the Minister of State for the Foreign and Commonwealth Office (Mrs Lynda Chalker) on 23 October 1986 in the following way (102 HC Official Report (6th series) written answers col 977):

'The normal criteria which the Government apply for recognition of a state are that it should have, and seem likely to continue to have, a clearly defined territory with a population, a Government who are able of themselves to exercise effective control of that territory, and independence in their external relations.'

166. Dugard p 60 describes the fourth requirement as the 'capacity to enter into relations with other states' and states:

'The capacity of a state to enter into relations with other states is a consequence of independence. If an entity is subject to the authority of another state in the handling of its foreign affairs, it fails to meet this requirement and cannot be described as an independent state.'

167. Professor Dugard discusses the position of four states in South Africa which, although they were independent, were unable to conduct international relations with other states as they were not recognised (see Dugard pp 60-64). In State v Banda 1989 (4) SA (B) 519 at 543 Friedman J had held that where a state had the infrastructure to implement relations with other states it was a state even if it was precluded from entering into such relations due to political considerations. Professor Dugard disagreed with this view which, he said, was out of touch with reality; there had to be both formal independence and functional independence.

168. In the light of the other sources cited to us we agree with Professor Dugard. From these sources we derive the principle that the fourth requirement of a state may be expressed as a capacity to enter into relations with other states and that there should be both formal and functional independence. We turn therefore to consider whether the Turkish Republic of Northern Cyprus has that fourth requirement.

169. Mr Beloff relied upon the opinions of Mr Monroe Leigh of 20 July 1990 and of Professor Lauterpacht and Mr Monroe Leigh of 31 May 1991. Mr Monroe Leigh was asked to give an opinion on 'the status in international law of the Turkish Cypriot and Greek Cypriot communities in Cyprus' and concluded that both communities were entitled to exercise equal rights under international law, including the right of self-determination. In his opinion Mr Monroe Leigh states that 'the territory controlled by the Turkish Cypriot government is at present no less eligible for statehood than its Greek Cypriot counterpart'. He states that the Turkish Republic of Northern Cyprus satisfies all the formal legal requisites of statehood, describing the fourth requirement as 'independence from foreign control of decision-making, particularly regarding relations with other states' and concludes that 'international law does not forbid its recognition by other states'. His conclusion is that --

'. . . the Turkish Cypriot community has a legal right to negotiate from a status of equality with the Greek Cypriot community in the current attempt . . . to reach a workable political solution for the unfortunate situation in Cyprus.'

170. We note that Mr Monroe Leigh concludes that the Turkish Republic of Northern Cyprus is 'eligible for' statehood; that its recognition 'is not forbidden'; and that it has a right to negotiate on a status of equality in reaching a solution. In our view this does not amount to a statement that the Turkish Republic of Northern Cyprus is a state.

171. In their opinion Professor Lauterpacht and Mr Monroe Leigh indicated that the political question was how to achieve a federal solution which would be acceptable to both sides and in order to do that it was necessary to identify the legal quality of the two communities. They concluded (at p 12) that --

'. . . the presence of Turkish forces in the north does not deprive the Turkish Cypriot community of the actual power and jurisdiction, amounting, in effect, to sovereignty, which it exercises there . . . The absence of general de iure international recognition of the status of the Turkish Cypriot Community under the name of the Turkish Republic of Northern Cyprus cannot deprive that Community of the sovereignty which as an indisputable matter of fact it exercises in Northern Cyprus -- a situation that is reflected in the extensive de facto relations that foreign States maintain with that Community.'

172. It seems to us that this is saying no more than that there is a government exercising de facto control, with which we have already agreed. The opinion does not go so far as to state that the Turkish Republic of Northern Cyprus is a state under international law.

173. In this connection we have referred to Oppenheim's International Law (9th edn, 1992) p 122 which states that sovereignty signifies independence which is the right to exercise the functions of a state to the exclusion of any other state. In view of the competing claims of the Republic of Cyprus it could not, in our view, be said that the Turkish Republic of Northern Cyprus has the right to exercise the functions of a state in the north of Cyprus to the exclusion of the republic.

174. Mr Beloff submitted that the contacts which the Turkish Republic of Northern Cyprus had with Her Majesty's government and with other states were in the nature of government-to-government dealings and evidenced the fourth requirement of independence. Dr Greenwood disagreed and relied upon the affidavit of Mr Warren-Gash and R v Minister of Agriculture Fisheries and Food, ex p S P Anastasiou (Pissouri) Ltd (Case C-432/92) [1994] ECR I-3087. Mr Beloff distinguished that decision and adopted the views of Dr Greenwood and Mr Vaughan Lowe in the Cambridge Law Journal (see [1995] CLJ 4).

175. In the Anastasiou case the question concerned certificates of origin of potatoes and fruit coming from Northern Cyprus. An agreement between the European Community and the Republic of Cyprus provided that the certificates of origin were to be issued by the republic. The United Kingdom accepted certificates from the Turkish Cypriot authorities so long as they did not refer to the Turkish Republic of Northern Cyprus by name but the applicants sought judicial review of that decision on the ground that the practice was contrary to European law. The Court of Justice of the European Communities held that the de facto partition of Cyprus did not justify a departure from the obligations of the agreement. As a treaty the agreement was not subject to unilateral alteration by one party.

176. Dr Greenwood and Mr Vaughan Lowe considered that that decision was against the trend of accepting day-to-day acts of unrecognised governments which were not contrary to the public policy of the forum and expressed the view that the policy of non-recognition should not be applied to the detriment of the population of the non-recognised entity.

177. In our view the facts of the Anastasiou case show that the ertificates from Northern Cyprus were accepted by the United Kingdom only on the basis that they were deemed to be issued on behalf of the Republic of Cyprus and that the United Kingdom had treated Northern Cyprus as acting on behalf of the republic and not as a separate state. This is in line with the treatment of Ciskei as part of South Africa in Gur Corp v Trust Bank of Africa Ltd [1987] QB 599.

178. In para 9 of his affidavit Mr Warren-Gash states that Her Majesty's government does not have any normal government-to-government dealings with any entity on the island of Cyprus other than the government headed by President Clerides which represents the Republic of Cyprus, although it does have a number of functional contacts with the Turkish Republic of Northern Cyprus. In Republic of Somalia v Woodhouse Drake & Carey (Suisse) SA, The Mary [1993] QB 54 Hobhouse J said that letters from the Foreign and Commonwealth Office were the best and conclusive evidence of the fact that Her Majesty's government had dealings with a foreign government and where Her Majesty's government had dealings with a foreign government on a normal government-to-government basis it was unlikely that the inference that the foreign government was the government of the state would be capable of being rebutted although the theoretical possibility of rebuttal existed.

179. In the light of the evidence of Mr Warren-Gash we conclude that the contacts which the Turkish Cypriot community in the north of Cyprus has with Her Majesty's government are not in the nature of government-to-government dealings but are functional contacts only.

180. Dr Greenwood submitted that the lack of recognition by states other than Turkey was evidence that the Turkish Republic of Northern Cyprus did not meet the criteria of statehood. Oppenheim's International Law (9th edn, 1992) p 130 states that the grant of recognition established that the new state, in the opinion of the recognising states, fulfilled the conditions of statehood required by international law and also says that the recognition of a new state by only one state would make it an international person only to the limited extent of its relations with that state but that such limited personality could not realistically be regarded as membership of the international community in general.

181. We find this argument rather circular as once a state is recognised then the recognising states will enter into relations with it but if it is not recognised they will not. If this were right then only recognised states would be states. However, the distinction may be of importance in a situation where some of the international community recognise a state and others do not. If sufficient numbers recognised a state it could be said that it was a state as it fulfilled all four requirements, even though some countries did not recognise it. However, that is not the case with the Turkish Republic of Northern Cyprus which is not recognised by any state other than Turkey.

Conclusion on the second issue

182. In view of the non-recognition of the Turkish Republic of Northern Cyprus by the whole of the international community other than Turkey we conclude that it does not have functional independence as it cannot enter into relations with other states. It does not, therefore, satisfy the fourth requirement of statehood.

183. Our decision, therefore, on the second issue for determination in the appeal is that if the words 'any foreign state in s 321 were to be interpreted so as to include states not recognised by Her Majesty's government then the Turkish Republic of Northern Cyprus would not be such a state as it fails to satisfy all the requirements of statehood.

Issue (3): Whether the appellants are Commonwealth citizens

184. The third issue for determination in the appeal is: 'Whether the appellants are Commonwealth citizens'.

The submissions of the appellants on the third issue

185. On behalf of the appellants Mr Beloff submitted that the appellants were not Commonwealth citizens and also submitted that the burden of proof was on the Revenue to prove that they were.

186. Commonwealth citizens were defined in s 37 of the British Nationality Act 1981 which used the word 'country'. That word was a legal term of art which had been defined in Dicey and Morris The Conflict of Laws (12th edn, 1993) p 26. The word 'country' had also been used in the rules of the International Amateur Athletic Association which had been considered in Reel v Holder [1981] 1 WLR 1226. The concept of 'country' was not the same as the concept of a state. He submitted that, within the context of the British Nationality Act 1981, a 'country' was the territory over which a government had authority. There were two governments operating in the island of Cyprus. The Republic of Cyprus was the area to the south of the green line and the Turkish Republic of Northern Cyprus was not part of that country. Neither government could assert that it was the government of the Republic of Cyprus.

187. Mr Beloff then submitted that internal citizenship laws were a matter for the lex loci and not the lex fori and cited: Stoeck v Public Trustee [1921] 2 Ch 67; Re Chamberlain's Settlement, Chamberlain v Chamberlain [1921] 2 Ch 533; Oppenheimer v Cattermole (Inspector of Taxes) [1975] STC 91, [1976] AC 249; and Dicey and Morris p 32.

188. Mr Beloff argued that, in the present case, the lex loci was the law of the Turkish Republic of Northern Cyprus. The appellants claimed to belong to the Turkish Republic of Northern Cyprus; that country had a nationality law; and under that law the appellants were citizens of the Turkish Republic of Northern Cyprus which was not a member of the Commonwealth. As the appellants resided out of the nationality jurisdiction of the country comprising the Republic of Cyprus they were not Commonwealth citizens. This accorded with the treatment of nationality in cases of state succession as described by Dr D P O'Connell in State Succession in Municipal Law and International Law (1967) Vol I, Internal Relations p 502.

189. Mr Beloff further submitted that the lex loci was not the law of the Republic of Cyprus. By recognising that any solution to the Cyprus question had to be reached by co-operation between the leaders of the Turkish and Greek Cypriot communities, the United Nations, in its Resolution 649, had recognised that there were de facto two territories and two laws in Cyprus. The expert evidence of Mr Necatigil established that the 1960 Constitution of the Republic of Cyprus contained provisions as to citizenship of Cyprus by reference to birth and descent. That constitution was based on the fundamental premise of bi-communal control but that had been frustrated by subsequent events. It followed that the 1960 Constitution no longer had legal effect. It could not therefore apply to make the appellants citizens of the Republic of Cyprus. The 1967 amendments to the 1960 Constitution, namely the Republic of Cyprus Citizenship Law of 1967 which had been passed by the Greek Cypriot administration, were without effect as far as the Turkish Cypriots were concerned as they did not participate in the passing of those laws and did not recognise them. He cited Colin Warbrick 'The New British Policy on Recognition of Governments' (1981) 30 ICLQ 568.

190. Mr Beloff further submitted that the principle of self-determination was a recognised principle of customary international law and he cited para 59 of the advisory opinion in the Western Sahara Case (1975) ICJR 12 at 33 and the Case Concerning East Timor (Portugal v Australia) (1995) ICJR 90. The principle had been violated in Cyprus by the exclusion by the South Cyprus government of the Turkish Cypriots from voting. Further he submitted that it was a principle of international law that individuals had a right to partake in free elections which ensured the free expression of the opinion of the people in the choice of legislature and he cited art 3 to Protocol I to the Convention for the Protection of Human Rights and Fundamental Freedoms (Paris, 20 March 1952; TS 46 (1954); Cmd 9221). In effect, the Turkish Cypriot community had been disenfranchised.

191. Mr Beloff also argued that if a country purported to confer nationality beyond the boundaries of its jurisdiction that purported conferment would not be recognised by international law and cited Oppenheimer v Cattermole (Inspector of Taxes) [1975] STC 91, [1976] AC 249 and Hersch Lauterpacht International Law (1977), vol 3 (The Law of Peace), pp 390-396. He submitted that the Special Commissioners should not give effect to the laws of the Republic of Cyprus which purported to impose citizenship on persons living outside the territory governed by that state who could not enjoy the benefits of citizenship. He also drew attention to the Nottebohm Case (Liechtenstein v Guatemala) (1955) 22 ILR 349 at 357-360 which, he said, should be borne in mind in deciding which of the two nationalities, Republic of Cyprus or Turkish Cypriot was the 'real and effective' nationality of the appellants.

192. Mr Beloff submitted that the granting of the exemption from tax should follow the trend established by the Hesperides, Somalia, Al-fin cases and the Foreign Corporations Act 1991 by protecting the population of an unrecognised state from the adverse impact on their lives. He also relied upon the advisory opinion of the International Court of Justice in Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa) [1971] ICJR 16 (the Namibia case).

193. Finally, Mr Beloff submitted that recognition of a foreign law did not entail the recognition of the law-maker as a government with sovereign power and by allowing the exemption from tax the Special Commissioners would not be recognising the Turkish Republic of Northern Cyprus as courts do not recognise states; that was the function of the executive. He cited the Carl Zeiss Stiftung case [1967] 1 AC 853 at 961.

The submissions of the Revenue on the third issue

194. On behalf of the Revenue Mr Henderson submitted that the appellants were Commonwealth citizens. He argued that the burden of proof was on the appellants to show that they were exempt from tax. He referred to s 50(6) of the Taxes Management Act 1970 and cited Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] STC 635. He also submitted that the question should be answered separately in relation to each appellant for each relevant year of assessment.

195. Next Mr Henderson referred to s 37(1) of the British Nationality Act 1981 and submitted that, within the context of Sch 3 to that Act, 'The Republic of Cyprus' could only mean the state of that name recognised by Her Majesty's government. He accepted that the 1981 Act used the word 'country' in the sense of a 'law district' as many states in the Commonwealth had separate law districts as indeed had the United Kingdom. But nationality was a function of statehood.

196. Mr Henderson accepted the principle established in Stoeck v Public Trustee [1921] 2 Ch 67 and Re Chamberlain's Settlement, Chamberlain v Chamberlain [1921] 2 Ch 533 that a decision on citizenship was a matter for the lex loci as a matter of private international law. However, the issue in the present appeal concerned the construction of the British Nationality Act 1981 which was a United Kingdom statute. When the 1981 Act was passed the Cyprus Act 1960 was still in force, although the developments of 1974 and 1975 were known. If Parliament had intended to refer to a state other than the Republic of Cyprus it would have said so.

197. Mr Henderson submitted that in order to ascertain the meaning of the words 'an enactment for the time being in force' it was necessary to identify the appropriate law-maker. He referred to Dicey and Morris The Conflict of Laws (12th edn, 1993) vol 1, p 234; vol 2, pp 992-993. The appropriate law-maker in the present case was the legislative organ of the Republic of Cyprus as that was the only government which was recognised internationally and with which Her Majesty's government had dealings. He cited Republic of Somalia v Woodhouse Drake & Carey (Suisse) SA, The Mary [1993] QB 54 at 65. The relevant enactments of the Republic of Cyprus about citizenship were contained in the Treaty of Establishment. Article 198 of the Constitution of 1960 and the amendments of 1967 which were, in form and content, a re-enactment of the treaty and the constitution. Although Mr Necatigil was of the view that the 1967 law was unconstitutional, Mr Polyviou disagreed and referred to the doctrine of necessity. However, this was not a question which the Special Commissioners should determine; they should recognise that there were two views and not take sides. The principle was that once a state had been recognised its legislation should be recognised also. He cited Aksionairnoye Obschestvo A M Luther v James Sagor & Co [1921] 3 KB 532; Princess Paley Olga v Weisz [1929] 1 KB 718; and A/S Tallinna Laevauhisus v Estonian State SS Line (The Vapper) (1947) 80 Ll L Rep 99.

198. Even if it were to be found that the 1967 law was not 'an enactment in force in the Republic of Cyprus' then the position would still be governed by Annex D to the Treaty of Establishment and art 198 of the 1960 Constitution under which the appellants became citizens of the Republic of Cyprus. Mr Necatigil had accepted that his citizenship of the republic under the 1960 Constitution had not disappeared but remained in suspense and that between 1963 and 1975 it was his only citizenship. That was inconsistent with the view that the constitution had disappeared.

199. The evidence of Mr Necatigil was that his current citizenship was governed by art 67 of the Constitution of, and Law No 25193 of, the Turkish Republic of Northern Cyprus. The Revenue accepted that, if those were the relevant laws, then the appellants were citizens of the Turkish Republic of Northern Cyprus. However, the citizenship laws of the Turkish Republic of Northern Cyprus were outside the contemplation of the British Nationality Act 1981 and, in any event, the courts of the United Kingdom should not give effect to those laws as the Turkish Republic of Northern Cyprus had not been recognised by Her Majesty's government. These were not routine acts of administration as the concept of citizenship was a matter for statehood. He cited Gur Corp v Trust Bank of Africa Ltd [1987] QB 599, Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 and Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] 1 QB 205 at 218 where Lord Denning MR had suggested obiter that there could be an exception for matters of routine administration.

200. It also had to be borne in mind that to deprive Turkish Cypriots of their Commonwealth citizenship would mean that they could no longer vote in elections in the United Kingdom under the Representation of the People Act 1983. Also there might be adverse effects on their right of abode under s 1(1) of the Immigration Act 1971.

Reasons for our decision on the third issue -- The burden of proof

201. We start by briefly considering the burden of proof. Mr Beloff submitted that the burden of proof was on the Revenue but Mr Henderson relied upon s 50(6) of the Taxes Management Act 1970 and Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] STC 653.

202. Section 50(6) provides:

'If, on an appeal, it appears to the majority of the Commissioners present at the hearing . . . that the appellant is overcharged by any assessment, the assessment shall be reduced accordingly, but otherwise any such assessment shall stand good.'

203. In Brady's case the taxpayer had guaranteed the performance of a contract between a car manufacturer and car designer and had contracted with the designer to perform the design work. Moneys were paid by the manufacturer to the designer. The Revenue assessed the taxpayer as the taxpayer had done the work. The Special Commissioners allowed the appeal as there was no evidence that the moneys had been received by the taxpayer and, if it had, the contract must have been fraudulent and the onus was on the Revenue to prove fraud which they had not done. The Court of Appeal held that where any assessment was made in time the burden was on the taxpayer to displace the assessment.

204. Mr Beloff did not pursue this point in reply. Having considered the authorities cited to us we are of the view that the burden of proof remains with the appellants to prove that they are entitled to the exemption in s 321 and, to do that, they have to prove that they are not Commonwealth citizens.

205. We also note the point made by Mr Henderson that the question should be answered separately in relation to each appellant in respect of each year of assessment. However, the parties agreed that we should reach a decision on the position of Mr Calgar with liberty to apply to submit further evidence in respect of the other appellants, it was not disputed that Mr Caglar was a citizen of the Republic of Cyprus before 1975.

British Nationality Act 1981 -- meaning of 'country'

206. We start by considering the statutory provisions in s 37(1) of the British Nationality Act 1981 which provides that every person, who under any enactment for the time being in force in any country mentioned in Sch 3 is a citizen of that country, shall have the status of a Commonwealth citizen. The countries listed in Sch 3 include the Republic of Cyprus but not the Turkish Republic of Northern Cyprus. That means that if the appellants are citizens of the Republic of Cyprus, under any enactment in force in the Republic of Cyprus, then they are Commonwealth citizens.

207. Mr Beloff sought to argue that a 'country' was a territory over which a government had authority but we can find no authority for this view in the authorities to which he referred. The word 'country' is defined by Dicey and Morris p 26 as 'the whole of the territory subject under one sovereign to one body of law'. In Reel v Holder [1981] 1 WLR 1226 at 1230 Lord Denning MR expressed the view that the word 'country' was not confined to sovereign states so that, for example, Scotland would be a country although it was not a sovereign state in the international sense. However, Scotland does not have a government separate from the United Kingdom government. In reaching a view about the meaning of 'country' we have adopted the definition of Dicey and Morris and have looked for a territory, a sovereign and a body of law. We have already discussed the subject of sovereignty and independence within the context of the fourth requirement for statehood and have concluded that there is only one sovereign in the island of Cyprus (excluding the two United Kingdom bases) which is the Republic of Cyprus. In our view that is the sovereign of the whole of the island (with the exception of the two bases). Although we acknowledge that there is a body of law in the north of the island the sovereign in the north is the Republic of Cyprus.

208. When the British Nationality Act was passed in 1981 Parliament must have been aware of the declaration of the Turkish Federated State of Cyprus in 1975 but nevertheless declared the Republic of Cyprus to be a 'country'. Also, Parliament must have had in mind the provisions of s 2(1) of the Cyprus Act 1960 which provided that the Republic of Cyprus comprised the entirety of the island of Cyprus. In the context of s 37(1) the word 'country' is part of the phrase 'country mentioned in Schedule 3'. Schedule 3 lists the 'Countries' whose citizens are Commonwealth citizens and includes the Republic of Cyprus. In our view it follows that, whatever is the meaning of the word 'country', within the context of that statute the Republic of Cyprus is a country.

What is the lex loci?

209. We accept the submissions of Mr Beloff that citizenship is a matter for the lex loci in private international law. Mr Beloff also submitted that the lex loci was the Turkish Republic of Northern Cyprus and not the Republic of Cyprus and relied upon Dr D P O'Connell State Succession in Municipal Law and International Law (1967) Vol I, Internal Relations p 498. Dr O'Connell discusses the effect of a change of sovereignty on nationality and describes 'nationality' in international law as 'the ascription of individuals to specific states for the purpose either of jurisdiction or of diplomatic protection'. The state concerned must first claim jurisdiction over the individual, or represent him internationally, before he will be ascribed to it. Where there is a change of sovereignty the successor state may claim to bring the individuals within its plenary jurisdiction or may claim to represent them in international matters. The municipal law of the predecessor state determines which persons have lost their nationality as the result of a change of sovereignty and the successor state determines which have acquired its nationality. The predecessor state loses its competence in international law to claim the inhabitants of absorbed territory as its nationals when the bond uniting it with them is dissolved.

210. We note that this whole discussion relates to a change of 'sovereignty' and we have already found that the only sovereign of the island of Cyprus (with the exception of the two bases) is the Republic of Cyprus. There has been no change of sovereignty in international law. Further, the Republic of Cyprus, in the Treaty of Establishment, in art 198 of the 1960 Constitution, and in the 1967 law, has claimed jurisdiction over all those born or descended from those born on the island. It has not determined that individuals north of the green line should lose that nationality. It still represents them internationally and the bond uniting the Republic of Cyprus with citizens north of the green line has not been dissolved in international law. This would point to the conclusion that the lex loci is the Republic of Cyprus.

211. Mr Henderson urged us to approach this issue from another direction and to ask what 'enactment for the time being was in force' by first identifying the appropriate law-giver. He relied on Dicey and Morris p 234 who state --

'. . . the territory of what was once a single country may be divided, for instance in times of revolution or civil war, or as a result of enemy occupation; and the question may then arise which of two legislatures or systems of courts has the right to determine the law of any given part of that territory. In this situation the problem to be resolved is not one of proof of foreign law but rather that of identifying the appropriate law-maker . . . Once . . . the appropriate law-maker has been identified, the question of proving what the content of the law handed down by that law-maker actually is will have to be determined by reference to the evidence of an appropriately qualified expert.'

212. Mr Henderson submitted that the appropriate law-maker was the Republic of Cyprus and cited a number of authorities.

213. In Aksionairnoye Obschestvo AM Luther v James Sagor & Co [1921] 3 KB 532 the Soviet government passed a decree in 1918 declaring certain saw mills to be the property of the republic. Agents of the republic seized the plaintiff's wood and sold it to the defendants who imported it into England. The plaintiffs sought a declaration that they were entitled to the wood but the Court of Appeal held that, as the government of this country had recognised the Soviet government as the de facto government of Russia at the date of the decree the validity of the sale to the defendant could not be impugned.

214. That decision concerned the recognition of governments and the United Kingdom ceased to recognise governments in 1980. However, we regard the decision as authority for the view that the acts of a recognised government or state cannot be impugned.

215. In Princess Paley Olga v Weisz [1929] 1 KB 718 the plaintiff sought to recover certain goods which had been seised in 1918 and then sold in 1928 by the Soviet Republic to the defendant. The British government had recognised the Soviet Republic as the de jure government of Russia in 1924. The Court of Appeal held that it could not inquire into the validity of the acts of a foreign sovereign power which had been recognised by the government of this country.

216. In The Vapper (1947) 80 Ll L Rep 99 the ship was lost in the war and policy moneys became payable. They were claimed both by the owners of the vessel and also by the Estonian State Steamship Line which claimed that the ship had been nationalised under a law of 1940. As a matter of evidence the defendants failed to establish that they were entitled to the vessel although Tucker LJ sought a declaration that they were entitled to the wood but the Court of Appeal held that, as the government of this country had recognised the Soviet government as the de facto government of Russia at the date of the decree the validity of the sale to the defendant could not be impugned.

216. In The Vapper (1947) 80 Ll L Rep 99 the ship was lost in the war and policy moneys became payable. They were claimed both by the owners of the vessel and also by the Estonian State Steamship Line which claimed that the ship had been nationalised under a law of 1940. As a matter of evidence the defendants failed to establish that they were entitled to the vessel although Tucker LJ indicated that, in view of the fact that the Estonian government had been recognised de facto, the nationalisation laws would not be invalid or unconstitutional.

217. We conclude that, for the purposes of s 37(1) of the 1981 Act, what we have to look for is an enactment for the time being in force in the Republic of Cyprus. Three such enactments are the Annex D of the Treaty of Establishment 1960, art 198 of the Constitution of Cyprus 1960 and the Republic of Cyprus Citizenship Law (No 3 of 1967). We also conclude that we should not inquire into the validity of the acts of the Republic of Cyprus which has been recognised by Her Majesty's government.

Are any of these enactments void for unconstitutionality?

218. Mr Beloff argued that the constitution no longer had legal effect and that the 1967 law was unconstitutional.

219. Mr Polyviou gave evidence on behalf of the Revenue about the position in the south of the island. We accept the evidence of Mr Polyviou who said that after 1963 the constitution had to operate without the Turkish Cypriots and some legislation was passed which was not in accordance with the constitution. In A-G of the Republic v Mustafa Ibrahim 1964 CLR 195 Mr Ibrahim was a Turkis Cypriot who was charged with warlike activities and argued that the Administration of Justice Law 1964, which amalgamated the High Court and the Constitutional Court of Cyprus, was contrary to the Basic Articles of the constitution and that the courts in Cyprus which were established under that Law had no jurisdiction to administer the law of Cyprus. The Supreme Court of Cyprus, which then consisted of the Greek Cypriot judges alone, held that the doctrine of necessity had to be implied to enable the state and government to function where it was not possible to adhere to the constitution and held that under that doctrine the enactment of the 1964 Law was valid.

220. We note that the law at issue in A-G of the Republic v Mustafa Ibrahim was the alteration of a Basic Article of the constitution which under the constitution could not be amended whereas art 198, which concerned citizenship, was not a Basic Article of the constitution and, under the constitution, could be amended.

221. In evidence Mr Necatigil agreed that he was a British national and a citizen of the United Kingdom and Colonies until 1960 and that in 1960 he became a citizen of the Republic of Cyprus as a result of Annex D of the Treaty of Establishment. However, his view was that after 1963 his citizenship of the Republic was in suspense. He did not consider himself bound by the Greek Cypriot law passed in 1967, which he said, was contrary to the constitution because at the time it was made Turkish Cypriots did not partake in the organs of government of the Republic of Cyprus as required by the Basic Articles of the constitution. Mr Necatigil used his passport issued by the Republic of Cyprus until it expired but could not renew it after 1974 as it was then impossible for Turkish Cypriots to have access to the issuing of passports in the south of Cyprus. He said that in 1975 he became a citizen of the Turkish Federated State of Cyprus as, after the Geneva Declaration of 1974, there were two autonomous administrations in the island.

222. The Turkish Cypriot community was a party to the Treaty of Establishment and to the 1960 Constitution, art 198 of which made all Turkish Cypriots citizens of the Republic of Cyprus. The treaty is still in force. Article 198 applies 'until a law of citizenship is made incorporating such provisions'. Article 198 is not a Basic Article of the constitution and is, therefore, capable of being amended. Its amendment by the 1967 law was, therefore, not unconstitutional in that sense. We accept that the 1967 law was made by a House of Representatives which did not include any Turkish Cypriots as required by art 62 but we also note that no other citizenship law was passed in the north of the island until, at the earliest, 1975 and we were not informed of any detailed law made before 1983. Members of the Turkish Cypriot community must have had some nationality before 1975 or 1983 and this must have been of the Republic of Cyprus. We therefore prefer the evidence of Mr Polyviou. the time it was made Turkish Cypriots did not partake in the organs of government of the Republic of Cyprus as required by the Basic Articles of the constitution. Mr Necatigil used his passport issued by the Republic of Cyprus until it expired but could not renew it after 1974 as it was then impossible for Turkish Cypriots to have access to the issuing of passports in the south of Cyprus. He said that in 1975 he became a citizen of the Turkish Federated State of Cyprus as, after the Geneva Declaration of 1974, there were two autonomous administrations in the island.

223. We are, therefore, of the view that Mr Caglar was made a citizen of the Republic of Cyprus under the treaty of 1960, which is still in force, and under art 198 of the constitution. That citizenship has not been withdrawn by the republic. Relying upon Luther v Sagor, Princess Paley Olga v Weisz, and The Vapper we should not inquire into the validity of the acts of the Republic of Cyprus. However, we do not need to decide the validity of the Law of 1967 as, if it is invalid then art 198 is still in force, if the Law of 1967 is valid then it is now in force instead of art 198. Either way Mr Caglar is a citizen of the Republic under an enactment in force in that country.

Does the principle of self-determination invalidate the enactments of the Republic of Cyprus?

224. Mr Beloff submitted that the principle of self-determination was a recognised principle of customary international law as also was the right to partake in free elections; as the Turkish Cypriot community had been disenfranchised that cast doubt on the validity of the nationality legislation in the republic. He cited the Western Sahara Case (1975) ICJR 12, the East Timor case (1995) ICJR 90 and the European Human Rights Convention (Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmd 8969)).

225. The reference to the principle of self-determination in the Western Sahara Case is first to Resolution 2625 of the United Nations which provides that every state has a duty to promote realisation of the principle of equal rights and self-determination 'in accordance with the provisions of the Charter' and then in para 59 of the Advisory Opinion which explains that in certain cases the General Assembly of the United Nations dispenses with the requirement of consulting the inhabitants of a given territory in cases where a certain population did not constitute a 'people' entitled to self-determination or the conviction that a consultation was unnecessary (see (1975) ICJR 12 at 33).

226. Bearing in mind Resolutions 541 and 550 of the United Nations it seems to us that the United Nations would not consider the people of the Turkish Republic of Northern Cyprus as a people entitled to self-determination, at least at the present time.

227. In the East Timor case Portugal instituted proceedings in the International Court of Justice against Australia on the ground that Australia had failed to observe the obligation to respect the duties and powers of Portugal as the administering power of East Timor and the right of the people of East Timor to self-determination. The court held that it had no jurisdiction to consider the application because it raised the issue whether the power to make treaties concerning East Timor belonged to Portugal or to Indonesia which was not a party to the proceedings and had not consented to the jurisdiction of the court. The court could not, therefore, rule on Portugal's claim although it took note that, for the two parties. East Timor remained a non-self-governing territory and its people had the right to self-determination.

228. We do not regard this statement as other than a statement of fact and not as a statement of principle.

229. Protocol 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms (TS 46 (1954); Cmd 9221) was signed in Paris on 20 March 1952 by the government members of the Council of Europe. Article 3 provides:

'The High Contracting Parties undertake to hold free elections at reasonable intervals by secret ballot, under conditions which will ensure the free expression of the opinion of the people in the choice of the legislature.'

230. As the Republic of Cyprus is now a member of the Council of Europe it seems to us that the provisions of this convention could be of interest to those in Cyprus who do not have a free expression in the choice of the legislature of the Republic of Cyprus. However, we are unable to reach a view on the significance of this provision as there was no convincing evidence before us as to the reason for the exclusion of people in the north of the island from voting for the legislature in the republic. On the one hand, we were told by Mr Polyviou that the Turkish Cypriot representatives abandoned the legislature in 1963 and abdicated their responsibilities; on the other hand, we were told by Mr Necatigil that it had been impossible for them to stay. On the one hand, we were told by Mr Polyviou that the presence of 35,000 Turkish troops in the north of the island was the reason why the government of the Republic could not exercise control there: on the other hand, we were told by Mr Necatigil that that was the wish of the people in the north.

231. In the light of the authorities cited to us we are unable to state with certainty that there is a principle of self-determination in customary international law, although the principle is in the treaty made by the Council of Europe. However, it is not for us to enforce the provisions of that treaty. On the evidence before us we are not prepared to decide that the 1967 Citizenship Law of the Republic of Cyprus is invalid on the ground that the Turkish Cypriots did not take part in free elections. If it is invalid then art 198 of the constitution is still in force.

Is the conferment of citizenship by the Republic valid in the north of Cyprus?

232. Mr Beloff argued that if a country purported to confer nationality beyond the boundaries of its jurisdiction that would not be recognised in international law and he cited Oppenheimer v Cattermole (Inspector of Taxes) [1975] STC 91, [1976] AC 249 and Lauterpacht International Law. In Oppenheimer's case Mr Oppenheimer was a German Jew who emigrated to England in 1939 and became a British subject in 1948. He received a pension from the Federal Republic of Germany and claimed exemption from income tax under a double taxation order on the ground that he had dual nationality. German law of 1913 provided that a German who was neither domiciled nor permanently resident in Germany lost his nationality on acquisition of a foreign nationality; a German decree of 1941 provided that a German Jew lost his nationality if he was ordinarily resident abroad at the date of the decree; and art 116(2) of the Basic Law of the Federal German Republic of 1949 provided that former German citizens who were deprived of their nationality for racial reasons were to be renaturalised on application. The House of Lords held that the decree of 1941 should not be recognised as the Constitutional Court of the Federal Republic had declared it invalid for the purposes of municipal law, and that the appellant had lost his German nationality under the provisions of the Basic Law unless and until he applied to be renaturalised which he had not done. Accordingly, he did not have dual nationality. Lord Cross discussed the effect of the 1941 decree and whether it had to be recognised by the English courts 'however inequitable, oppressive or objectionable it may be' and expressed the view obiter that it could be ignored and said ([1975] STC 91 at 119, [1976] AC 249 at 277):

'If a foreign country purported to confer the benefit of its protection on and to exact a duty of allegiance from persons who had no connection or only a very slender connection with it our courts would be entitled to pay no regard to such legislation on the ground that the country in question was acting beyond the bounds of any jurisdiction in matters of nationality which international law would recognise.'

233. Mr Henderson distinguished that decision which, he said, was not in the same category as the present case. In 1941 England was at war with Germany whereas Her Majesty's government enjoyed cordial relations with the government of the Republic of Cyprus. There had to be 'wholly unusual circumstances' for a court not to recognise the laws of a foreign country and he relied on the judgments of Lord Cross and Lord Salmon.

234. We take Oppenheimer's case to be authority for the view that normally a judge should be very slow to refuse to give effect to the legislation of a foreign state in any sphere in which, according to the accepted principles of international law, the foreign state has jurisdiction. However, it might be necessary, where a law constituted a grave infringement of human rights, not to recognise it as a law at all. However, that is not the same as saying that a purported grant of nationality should be ignored.

235. Lauterpacht ch 1 discusses certain questions of nationality including the right of a state to impose its nationality on persons resident abroad. Against the background of discriminatory German legislation, the author expresses the view that international law concedes to states the right to regulate matters of nationality but the discretion which a state enjoys in this matter is subject to general principles of law, to legitimate rights of other states, and to fundamental human rights. He refers to the Hague Convention on Certain Questions relating to the Conflict of Nationality Laws of 1930 (The Hague, 12 April 1930; TS 33 (1937); Cmd 5553) which provided that, while it is for each state to decide under its own law what persons are its nationals, other states are under a duty to recognise such law 'only in so far as it is consistent with international conventions, international custom, and the principles of law generally recognised with regard to nationality'. He goes on to state that the right of a state to impose its nationality on persons outside its territory should be restricted but illustrates that general statement by reference to the discriminatory German legislation.

236. In the light of that view we consider that we are under a duty to recognise the nationality laws in Cyprus. On the one hand, the laws of the Republic of Cyprus accord with the Cyprus Act 1960 and with the treaties to which the United Kingdom is a party, and are recognised by the international community. The laws of the Turkish Republic of Northern Cyprus, on the other hand, are not consistent with the Cyprus Act 1960 nor with the treaties to which the Turkish Cypriot community was a party and are not recognised by the international community.

237. Mr Beloff also drew our attention to the decision in the Nottebohm case (1955) 22 ILR 349 at 358 where the International Court of Justice said:

'When one State has conferred its nationality upon an individual and another State has conferred its own nationality on the same person, it may occur that each of these States, considering itself to have acted in the exercise of its domestic jurisdiction, adheres to its own view and bases itself thereon in so far as its own actions are concerned. In so doing each State remains within the limits of its domestic jurisdiction.'

238. The court went on to point out that, on the international plane, an applicant state might invoke nationality as against the respondent state and arbitrators would then have to decide whether the applicant state was entitled to exercise protection. Where two states each claimed the right to confer nationality then the court gave preference to the 'real and effective' nationality which accorded with the facts and was based on stronger factual ties between the person concerned and one of the states. Although the factors would vary, important factors were: habitual residence, the centre of the individual's interests, his family ties, his participation in public life, the attachment shown by him for a given country and inculcated in his children, and other factors.

239. In the Nottebohm case the dispute was between Guatemala and Liechtenstein both of which were recognised states. In the present case the Turkish Republic of Northern Cyprus is not a recognised state. The International Court of Justice accepts that, under domestic law, two states may both confer nationality upon a citizen and they are entitled so to do within their domestic jurisdiction although there may be a dispute on the international plane. From this we conclude that there would be no bar to the appellants being citizens both of the Republic of Cyprus and of the Turkish Republic of Northern Cyprus if that were a state.

Will the courts acknowledge the citizenship laws of an unrecognised foreign government?

240. Mr Beloff argued that citizenship laws were within the category of laws which the courts would acknowledge even when made by an unrecognised government and cited the Hesperides, Somalia and Al-fin cases, the Foreign Corporations Act 1991 and the Namibia Case (1971) ICJR 16.

241. We have discussed the first four authorities in paras 100-120 above and concluded in para 121 (see p 172 d e):

'The principle we extract from these authorities is that the courts may acknowledge the existence of an unrecognised foreign government in the context of the enforcement of laws relating to commercial obligations or matters of private law between individuals or matters of routine administration such as the registration of births, marriages or deaths. This principle is in line with that adopted in the Foreign Corporations Act 1991. However, the courts will not acknowledge the existence of an unrecognised state if to do so would involve them in acting inconsistently with the foreign policy or diplomatic stance of this country.'

242. In their decision in the Namibia case [1971] ICJR 16 at 56 (para 125) the International Court of Justice expressed the view that the non-recognition of South Africa's administration of the territory should not deprive the people of Namibia of any advantages derived from international co-operation; although official acts performed by the government of South Africa were illegal and invalid that invalidity did not extend to the registration of births, deaths and marriages which could be ignored only to the detriment of the people of

Namibia.

243. Dr O'Connell describes nationality as 'the ascription of individuals to specific states for the purpose either of jurisdiction or of diplomatic protection' (see Dr D P O'Connell State Succession in Municipal Law and International Law (1967) Vol I, Internal Relations p 498).

244. In our view the laws of citizenship are so related to the status of sovereign states in international law, and to their capability of offering diplomatic protection, that they could not be described as routine matters of administration in the same category as the registration of births, marriages and deaths. Neither are they commercial obligations nor matters of private law as between individuals. Accordingly, in our view they are not within the category of laws which the courts would recognise even when made by an unrecognised government.

The consequences of a finding that the appellants are not Commonwealth citizens

245. Section 1 of the Representation of the People Act 1983 provides that a person entitled to vote at a parliamentary election in any constituency must be resident there, must not be subject to a legal incapacity, must be of voting age, must be registered in the register of parliamentary electors in a constituency, and must be either a Commonwealth citizen or a citizen of the Republic of Ireland. The Immigration Act 1971 gives certain rights of abode in the United Kingdom to certain Commonwealth citizens. As submitted by Mr Henderson, if we were to find that the appellants were not Commonwealth citizens then that finding could have adverse effects on the rights of all Turkish Cypriots under the Representation of the People Act 1983 and possibly also under the Immigration Act 1971. Mr Beloff argued that the legislature could take measures to correct that effect but we prefer the view that Parliament intended all citizens of the Republic of Cyprus as defined in s 2(1) of the Cyprus Act 1960, to be Commonwealth citizens.

Conclusion on the third issue

246. On the evidence before us we find that Mr Caglar is a citizen of the Republic of Cyprus under an enactment for the time being in force in the Republic and, as such, has the status of a Commonwealth citizen.

`247. Our decision on the third issue for determination in the appeal is that Mr Caglar is a Commonwealth citizen.

Decision

248. We summarise our decisions on the issues for determination in the appeal as: (1) that the words 'any foreign state' in s 321(1)(b) mean any foreign state recognised by Her Majesty's government; (2) that the Turkish Republic of Northern Cyprus is not an unrecognised foreign state; and (3) that Mr Caglar is a Commonwealth citizen.

249. The appeal is, therefore, dismissed.

250. Either party has liberty to apply for: (1) a determination of the amount of each assessment; (2) a determination of the issue as to whether the Revenue were entitled to raise the first two assessments on Mr Genc outside the six-year time limit; and (3) a determination of the nationality of any of the appellants other than Mr Caglar.

251. In accordance with s 56A(2) of the Taxes Management Act 1970 we hereby certify that our decision involves a point of law relating wholly or mainly to the construction of an enactment which has been fully argued before us and fully considered by us. This means that if both parties consent, and if the leave of the Court of Appeal is obtained, the appellants may appeal from our decision directly to the Court of Appeal.

DISPOSITION: Appeals dismissed

SOLICITORS: Theodore Goddard; Solicitor of Inland Revenue