Banks: A real Brexit tax
In A Banks v HMRC  UKFTT 617, the First-tier Tribunal (FTT) heard an appeal by Mr Arron Banks against HMRC's decision to deny him relief on certain donations he and his companies had made to the UK Independence Party (UKIP). The FTT decided that his rights had been infringed under the European Convention on Human Rights (the Convention) but there was nothing it could do to remedy that infringement.
A copy of this article was first published in Tax Journal on 10 January 2019. A copy of that article can be viewed here.
Inheritance tax and the exemption for gifts to political parties
Mr Arron Banks will be known to many readers as a prominent 'Vote Leave' figure during the Brexit referendum. Mr Banks and his companies made donations to UKIP between October 2014 and March 2015, in amounts totalling nearly £1m.
When an individual makes a gift that gift will be chargeable to inheritance tax (IHT) unless it benefits from a relief or exemption.
It was accepted that the donations were "transfers of value", within the meaning of section 3, Inheritance Tax Act 1984 (IHTA). It was also agreed that the transfers of value comprising the donations made by the companies controlled by Mr Banks should be treated as having been made by him under section 94, IHTA (charge on participants where a close company makes a transfer of value). The only dispute between the parties was whether the donations qualified for exemption from IHT under section 24, IHTA (gifts to political parties). So far as relevant, section 24 provides as follows:
"24. Gifts to political parties
(1) Transfers of value are exempt to the extent that the values transferred by them —
(a) are attributable to property which becomes the property of a political party qualifying for exemption under this section;
(2) A political party qualifies for exemption under this section if, at the last general election preceding the transfer of value,—
(a) two members of that party were elected to the House of Commons, or
(b) one member of that party was elected to the House of Commons and not less than 150,000 votes were given to candidates who were members of that party". (Emphasis added).
In order for a gift to a political party to qualify for exemption from IHT under section 24, the political party concerned, at the last general election preceding the transfer of value, must have had at least two MPs or one seat and 150,000 votes. The effect of UKIP’s failure to have any of its candidates elected as MPs at the general election on 6 May 2010, which was the general election preceding the date on which the donations were made by Mr Banks, was that the donations did not meet the conditions in section 24 for exemption from IHT. This was the case even though:
1. UKIP secured a greater proportion of the popular vote at that general election than other parties that did succeed in having candidates elected (and to which donations made at the time of Mr Banks’ donations to UKIP would have qualified for exemption under section 24);
2. at the time of some of the donations, there were UKIP MPs, but they had been elected at by-elections held after the relevant general election;
3. at all material times, UKIP was a registered political party under the Registration of Political Parties Act 1998 or the Political Parties Referendums and Elections Act 2000;
4. at the time of the donations, UKIP was widely represented on local councils in the UK; and
5. UKIP candidates had been elected to the European Parliament at the immediately preceding election (on 22 May 2014) and UKIP had secured the largest proportion of the popular vote of any UK political party at those elections and had more elected members of the European Parliament than any other UK political party.
There was, therefore, no dispute that, on a strict reading of section 24, the donations were not exempt from IHT. However, Mr Banks contended that such a reading of section 24 would constitute a breach of his human rights under the Convention on the following grounds:
a) Article 14 of the Convention, together with Article 1 of the First Protocol (A1P1), in that it amounted to an unlawful interference with his property; or
b) Article 14, together with either Article 10 (freedom of expression) or Article 11 (freedom of assembly).
Insofar as the application of section 24 constituted a breach of the Convention, Mr Banks argued that, pursuant to section 3, Human Rights Act 1998 (HRA), the FTT must, so far as it is possible to do so, read and give effect to section 24 in a way that is compatible with his Convention rights. He also argued that the application of section 24 involves a breach of the UK’s obligations under Article 4(3) of the Treaty on European Union (TEU). If there had been a breach of EU law, the FTT must either construe section 24 in a manner which was consistent with EU law or, if a conforming construction was not possible, dis-apply the offending provisions.
Did the strict application of section 24 IHTA infringe Mr Banks' A1P1 and Article 14 rights under the Convention?
In deciding this question, the FTT considered the following five questions:
1. Did the facts fall within the ambit of one or more of Mr Banks' Convention rights?
The parties agreed that, in principle, tax provisions do fall within A1P1 because they deprive the person concerned of a possession, namely, the amount of money that must be paid to the fiscal authority, and that any potential discrimination arising from the application of section 24(2) fell within the ambit of A1P1.
2. Was there a difference in treatment in respect of that right between Mr Banks and others put forward for comparison?
Again, the parties accepted that there was a difference in treatment in respect of the tax treatment of the gifts made by Mr Banks to UKIP and a gift made by another person to a political party which met the conditions in section 24(2), for example, the Labour Party or the Conservative Party.
3. If so, was the difference in treatment on one or more of the proscribed grounds under Article 14?
Mr Banks argued that the application of the conditions in section 24(2) to the donations made by him amounted to discrimination on the grounds of his “political opinion”, or his "other status" (as a supporter of UKIP), contrary to Article 14. The Convention, he submitted, would not be providing a practical and effective guarantee against discrimination on the grounds of political opinion if it was read so narrowly as to not extend to protection against discrimination in relation to one of the 'clearest expressions' of political opinion, namely, the making of a donation to a political party. HMRC's position was that Mr Banks was treated differently, not because of his political opinion, but because he chose to donate to a political party that did not meet the threshold test in section 24(2).
The FTT agreed with Mr Banks. In its view, the Convention is to "guarantee not rights that are theoretical and illusory but rights that are practical and effective”, as was set out in R (Clift) v Secretary of State for the Home Department  1 AC 484. Mr Banks had, therefore, been discriminated against. The FTT commented at paragraph :
"If a person cannot express a protected characteristic in a most natural way [i.e. making a donation to a political party] by virtue of differential treatment, the protection is essentially meaningless."
4. Were those others in an analogous situation?
For an issue to arise under Article 14, there must be a difference in treatment of persons in “analogous or relevant similar situations”. HMRC accepted that Mr Banks was in an analogous position to others who did not suffer taxation on their political gifts, namely, those individuals who made gifts to the Labour Party, or the Conservative Party.
5. Was the difference in treatment objectively justifiable in the sense that it had a legitimate aim and bore a reasonable relationship of proportionality to that aim?
The FTT, again in agreeing with Mr Banks, said that the correct approach is to determine whether, after weighing all relevant factors, the measure adopted achieves a “fair balance” between the public interest being promoted and the other interests involved.
In terms of the approach to be adopted on proportionality, the FTT said that (a) the approach that it should take to the question of the degree of scrutiny to be applied to the differential treatment clearly depends upon a number of factors; and (b) political opinion or political affiliation should be treated as one of the more sensitive grounds of discrimination. The FTT said at paragraph :
"To my mind, political opinion is a sensitive ground of discrimination. There is good reason why political opinion is expressly referred to in Article 14. The tolerance of the political views of others – particularly those with whom we might disagree – is central to democracy. I will treat it as a ground which requires cogent reasons for any differential treatment."
HMRC submitted, however, that the differential treatment in this case arose from an Act of parliament and, therefore, an increased level of "deference" was required. The FTT said that although tax is an area in which due deference has to be shown to the legislature, any discrimination must be justified and that involves a court or tribunal considering where the balance should be struck between the interests of the complainant and the interests of the community as a whole.
In terms of whether section 24(2) pursues a legitimate aim, the FTT said that the aim of the legislature should be respected unless the differential treatment is "manifestly without reasonable foundation". In relation to this point, Mr Banks argued that the provision did not pursue a legitimate aim but, rather, related to certain issues which were present in the mid-1970s, such as 'short funding' (where sustainable funding was not available to political parties), which were not relevant in our present day democracy. HMRC's position was that the legislation has a legitimate aim, namely, to support the private funding of political parties that are participating in parliamentary democracy and to limit the scope for abuse by denying relief for political donations unless the conditions in section 24(2) are satisfied.
The FTT, in agreeing with HMRC on this point, observed that the words of the legislation itself evidence the legitimate aim being pursued of ensuring that valuable tax relief is limited in order to prevent abuse of that relief. In the view of the FTT, that aim was not "manifestly without reasonable foundation".
With regard to whether the differential treatment bore a reasonable relationship of proportionality to those aims, it was necessary for the FTT to determine whether the measure adopted achieved a “fair balance” between the public interest being promoted and other interests. The FTT decided that the chosen means to address the legitimate aim identified were not proportionate in the context of the differential treatment that resulted from the legislation. The FTT said at paragraph :
"… the concentration in s24(2) on MPs elected at the previous general election under a first past the post system does not strike a fair balance in the context of the provision of tax relief for the funding of political parties – whatever the advantages and disadvantages of that electoral system for the purposes of representative democracy.
For those reasons, in my view, the differential treatment of Mr Banks’s donations to UKIP cannot be objectively justified by reference to the current conditions in s24(2) IHTA."
The FTT therefore concluded that the 'first past the post' system does not, on its own, represent a fair barometer of public support for a political party. The resulting test in section 24(2) was likely to be prejudicial to supporters of new parties, even where those parties can demonstrate meaningful levels of public support. The FTT commented at paragraph :
"Whilst I appreciate that wherever a line is drawn it may throw up some anomalies, I cannot agree that the current test is an appropriate one to apply to tax relief for donations. There are a number of other options available to Parliament to achieve that aim which would not have such a disproportionate effect on supporters of new political parties or parties that, despite being able to demonstrate a meaningful level of public support, are not represented in a parliament elected under that system."
In light of the above, the critical issue for the FTT to determine was what remedy should be available to Mr Banks. The question was whether it was possible for the FTT to interpret or re-write section 24, in accordance with section 3, HRA, in a manner which sets conditions which are compliant with Mr Banks' Convention rights.
Although the FTT agreed that some of the suggestions offered by Mr Banks to deal with this issue were viable, the FTT did not consider it was in a position to, for example, set the level of the number of representatives which a political party has to have in a particular parliament or the number of votes which it must receive at any given general election, in order to satisfy the conditions contained in section 24(2). Those were matters for parliament and not the FTT to decide. It said at paragraph :
"The Tribunal does not have powers to make a declaration of incompatibility under s.4 HRA. The powers of the Tribunal are limited to determining whether or not the assessment should be upheld. Accordingly, as I am not able to re-write the legislation for the reasons that I have given, I must dismiss this ground of appeal."
As a result of its findings on this ground of appeal, the FTT also dismissed the remaining grounds of appeal relating to Articles 10 and 11 of the Convention (these grounds relied on the same argument in relation to the correct interpretation of section 24(2)).
The FTT also held that Article 4(3) of the TEU did not give rise to a directly enforceable right and the appeal was dismissed.
This decision highlights the difficulty of relying on Human Rights based arguments in the context of tax appeals. Even though the FTT was of the view that section 24(2) was discriminatory and interfered with Mr Banks' Convention rights, it was unable to provide a remedy. The FTT did not consider it was appropriate for it to override the clear statutory language. The setting of the threshold for exemption was a matter for parliament. The FTT cannot legislate to correct what might be considered an injustice and was unable to rely on section 3, HRA, to 'read down' the provision in order to provide relief to Mr Banks. It remains to be seen whether, should Mr Banks decide to appeal the FTT's decision, a higher court would take a different view on whether section 24 should be read down to provide a remedy to Mr Banks or make a declaration of incompatibility under section 4, HRA, which the FTT is not empowered to make.
A copy of the decision can be viewed here.