Going backwards? Retrospective legislation can bite!

10 August 2011. Published by Daniel Hemming, Partner

Retrospective legislation is a particularly hot topic at the moment.

Looking back in anger

Recently, the Court of Appeal has held, in the joined appeals of two judicial review cases, that section 58 of the Finance Act 2008 ("FA 2008"), although having retrospective effect, does not infringe the European Convention on Human Rights ("ECHR").  The decisions of the Court of Appeal upheld the reasoning of the High Court in the important case of R (Huitson) v HMRC [2010] EWHC 97 (admin).  The decisions of the Court of Appeal are reported at R (Huitson) v HMRC [2011] EWCA 893; R (Shiner and anor) v HMRC [2011] EWCA 892.

The facts

In Huitson the claimant applied for judicial review of the compatibility of FA 2008 section 58(4) with the ECHR on the basis that Article 1 of the First Protocol guaranteed him the right to peaceful enjoyment of his possessions.  The claimant operated through tax consultants which used a tax avoidance scheme centred on the Isle of Man which sought to take advantage of the UK and Isle of Man Double Taxation Agreement ("DTA").  Consultants set up a partnership of companies incorporated and resident on the Isle of Man.  One company was a trustee of a trust incorporated there under which the claimant was the settlor.  The claimant contracted with the partnership which acted as an intermediary by contracting out and being paid for his services.  Part of his pay included payment as the owner of a life interest in the trust and the claimant claimed relief from UK income tax under article 3(2) of the DTA for amounts representing trust income.  HMRC advised him that it was likely that they would challenge the validity of the claim and advised him to make a payment on account.  However, the claimant continued to claim relief and less than 6 years later he was informed by HMRC that it was preparing cases concerning the validity of claims for double taxation relief.

Instead, Parliament struck down the arrangements in issue by introducing section 58 of FA 2008. The goal posts were thus retrospectively moved.  The claimant argued that that matter should instead have been litigated through the Tribunal in the usual way.  If HMRC had lost then Parliament should simply have allowed the successful taxpayer to keep the money.  Failure to do so made the retrospective legislation disproportionate to the object HMRC were seeking to achieve.

The Court's decision

The High Court and Court of Appeal had little sympathy with the arguments raised by the taxpayer.  It was within Parliament's discretion to legislate, with retrospective effect, to prevent taxpayers from using, by wholly artificial arrangements, the DTA for a purpose for which it was not intended.  HMRC had given no assurance that any legislative response would be prospective only.  Even if the arrangements worked under the DTA, taxpayers could reasonably have expected that Parliament would respond in a way that ensured fairness generally between all taxpayers resident in the UK.  The court was emphatic that the UK was not obliged to test the matter first in the Tribunal or courts before enacting retrospective legislation.  Public policy was of such paramount importance that legislation was necessary to put the position beyond all doubt and to maintain the relevant policy behind the legislation.  Furthermore, litigation would probably have been protracted, costly and uncertain.

The Court of Appeal also dismissed an argument that the provisions of section 58 were a breach of the free movement of capital under article 56 of the Treaty of the European Community (now article 63 of the Treaty on the Functioning of European Union).

Where are we now?

The decision of the Court of Appeal sounds a warning bell for promoters of schemes considered by HMRC to be highly aggressive and is yet one more weapon in the formidable (some would say forbidding) arsenal of weapons which HMRC have developed to combat tax avoidance.

We would sound a cautionary note here. Our concern is not that the legislation in issue was necessarily inappropriate in this particular case, rather it is whether Parliament will use this device so frequently that it becomes difficult for taxpayers to order their affairs with any sense of certainty or clarity of what the outcome will be.  It is already difficult enough, with one of the world's most complex fiscal codes, for taxpayers doing business in the UK to operate with commercial certainty and having the sword of Damocles of retrospective legislation poised over their heads will certainly not assist in this respect. The right balance has to be struck and it remains to be seen whether HMRC will strike it.


….and finally

One of the various allegations flying around during the recent phone hacking brouhaha is that some rogue officers in the Met might have accepted "inappropriate payments" for giving tip-offs to tabloid journalists. To many, this will be seen as an appalling example of the excesses of sections of the press and their nefarious influence on the governance of our country. To HMRC however, it seems to have sent the ££££ signs flashing, as they consider how best to tax the aforementioned inappropriate payments - see this article in the Guardian.  Since the Court of Appeal decision in IRC v. Aken [1990] 1 W.L.R. 1374, where "Miss Whiplash" unsuccessfully argued that HMRC were trying to live off immoral earnings (i.e. hers), HMRC consider that the earnings of any "trade" are taxable, however dubious that trade may be.

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