Retrospective legislation: where are we now?
I commented last year on the important decision in Huitson, in which the Court of Appeal, hearing a joined appeal from two judicial review claims,...
…found that retrospective changes made to tax legislation to counter avoidance arrangements structured around the UK/Isle of Man double taxation treaty did not breach a taxpayer's right to enjoyment of his possessions, as enshrined in Article 1 Protocol 1 of the European Convention on Human Rights.
I comment below on three recent events which suggest that the enthusiasm of the government and HMRC for retrospective legislation, as a weapon to counter what they perceive to be 'aggressive' tax avoidance, remains undiminished.
1. Corporate buy-backs
On 27 February 2012, the exchequer secretary to the Treasury, David Gauke MP, released a written ministerial statement announcing that the government would introduce legislation to counter arrangements designed to avoid corporation tax on buy-backs of corporate debt. The legislation is to apply to debt purchases that occurred on or after 1 December 2011 (ie. three months prior to the statement), and therefore has retrospective effect. The statement observes that:
"This is not action that the Government is taking lightly. But the potential tax loss from this scheme and the history of previous abuse in this area, means that the Government believes that this is a circumstance where action to change the legislation with full retrospective effect is justified to ensure that the system is fair for all and that those who seek to benefit from this aggressive avoidance do not get an unfair advantage."
2. The budget speech
In his budget speech delivered on 21 March 2012, the Chancellor of the Exchequer made the following comments in relation to new SDLT anti-avoidance measures:
"Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament. I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned." (my emphasis).
3. Protocol on unscheduled changes in tax law
On 26 March 2012, HMRC re-publicised its Protocol on unscheduled announcements of changes in tax law, which was first published in March 2011 in the Treasury document Tackling Tax Avoidance. The protocol sets out criteria which ministers must observe when considering changes to tax law which will (1) be announced other than as part of a Budget, and (2) take effect before the legislation implementing the change is enacted.
The protocol is targeted towards retrospective legislation which has at least been announced (and usually published in a draft form), if not enacted, on the date from which it is to take effect. The protocol acknowledges that legislation which takes effect before it is even announced (like the corporate buy-back legislation referred to above) is a different matter, noting that: "changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional".
When talking about retrospective legislation, a good starting place are the words of Adam Smith. In his Inquiry into the Nature and Causes of the Wealth of Nations where he said:
"The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person."
Retrospective legislation drives a coach and horses through this principle. It makes business planning almost impossible. It adds to the already difficult burden of an over-lengthy and complex tax code.
There is a difficult balancing exercise here. On the one hand, there is the perceived need to counter 'aggressive' tax avoidance arrangements and the loss such arrangements cause to the exchequer. On the other, there is the need for legal certainty, which is seriously undermined by retrospective legislation and the rights of taxpayers to peaceful enjoyment of their possessions under the European Convention on Human Rights.
There are two key points to make here. Firstly, the exchequer already has a huge armoury of legislative weapons available to it to tackle tax avoidance. Secondly, the debate surrounding tax planning has unfortunately become heavily politicised with the government choosing to attack those who engage in what they describe as 'unacceptable' tax avoidance. However, 'unacceptable', 'aggressive' or 'artificial', words which the government and senior members of HMRC regularly use in an attempt to win over public opinion for their actions, are subjective and have little real meaning. What is 'unacceptable' to George Osborne may not necessarily be unacceptable to you or me. Reliance on such terms in guiding tax policy and future legislation engenders uncertainty. Individuals and companies which seek to manage their tax affairs and mitigate their liabilities in a legal manner, cannot be certain that they will not one day fall on the wrong side of the 'unacceptable' avoidance line drawn by the government and HMRC and find themselves subject to retrospective changes to fiscal legislation.