What is retrospective tax legislation?
According to the Chartered Institute of Taxation (CIOT), retrospective tax legislation is:
‘legislation that is retrospective in the full sense of the term, in that the legislation imposes (or increases) a tax charge on income earned, gains realised or transactions concluded at a time before the legislation was announced’
However, the Government and / or HMRC will often argue that a provision, which appears to be backward facing is merely retroactive. Retroactive legislation is defined, again by the CIOT as:
‘legislation [that] imposes a tax charge on income arising or a gain realised after the date when the legislation comes in to force, but that income or gain arises from transactions entered in to (or at least commenced) before the legislation’
Parliament is sovereign – can’t it do what it likes?
Of course, Parliament is ‘supreme’ and can legislate retrospectively. However, it is constrained by both the European Convention on Human Rights (“ECHR”) and also other EU provisions.
That said, even this moderation may be removed where such provisions are proportionate. In other words, they do not upset the balance between individual taxpayer and the general public at large.
Prohibition against retrospective criminal legislation
Of course, this makes sense.
Fundamental to the ‘rule of law’ is that one should subsequently be criminalised for conduct that was perfectly legal at the time one carried out that conduct.
This is enshrined in Article 7 of the European Convention of Human Rights (“ECHR”).
What about tax law?
There is no general prohibition on retrospective tax legislation.
In 2005, the ICAEW tax faculty produced a note (TAXREP 8/05) around retrospective tax legislation largely as a result of the Dawn Primarolo statement (See below). It stated that they were opposed to retrospective tax legislation ‘in principle’. This was, at that time, for three reasons:
- It failed the test of certainty
- The legal basis for retrospective legislation was ‘now questionable’ under EU law; and
- It undermines the credibility of the UK tax system
In a document published on 18 July 2012 by the Library of the House of Commons entitled Retrospective taxation: earlier debates these concerns were countered (or at least it attempted to summarise the real objections to these points) as follows:
- The battle between scheme providers and HMRC has gone on for so long, that one should not be surprised if one uses a scheme and therefore has to pay the money back – even via a retrospective change in the law;
- Retrospective tax legislation is not, in itself, prohibited by ECHR – the key question is whether the backdating of the legislation strikes a fair balance between those affected positively and those affected negatively; and
- That, in relation to some of the esoteric remuneration tax planning entered in to around the time of the Primarolo statement, it was actually these schemes that were undermining the credibility of the UK tax system
Later, in 2010, The Chartered Institute of Taxation issued a discussion paper (“CIOT discussion paper”) on Retrospective Taxation as a response to what it saw as ‘the increasing use of retrospective action in the tax system’.
The CIOT discussion paper
The CIOT stated that they ‘do not say that there is never a case for retrospection…However it is something that should be used with extreme care and justified at length’
At this time, the CIOT argued that the Government should ‘develop and adopt a clear statement’ on the use of retrospective legislation. As it happened, the Government did precisely this in the form of its Protocol on unscheduled changes in tax law (“The Protocol”) published in March 2012 (see below).
Broadly, the CIOT was quite happy for retrospective legislation to be used to correct anomalies which would essentially assist the taxpayer.
Secondly, they were also open to changes by Ministerial Statement where an announcement is made to counter a specific arrangement (sometimes draft legislation is provided as well). This, one supposes, is not really retrospective as it draws a line in the sand from today and applies to transactions thereafter. However, this was subject to such announcements being:
- Carefully targeted;
- Precise enough regarding the timings and also the target of the new rules; and
- Provide for debate and / or consultation
However, outside of these two areas, the CIOT was of the view that there should be a ‘general presumption against retrospective legislation’.
The Rees Rules
I now press the rewind button.
In April 1978, the then Chancellor Denis Healy announced two measures blocking ‘highly artificial [tax avoidance] schemes.’ He went on to announce that:
‘the time has come to not only stop the particular schemes we know about but also…[those] of a similar nature that can be marketed in the future. So the provisions I shall be introducing this year to deal with artificial avoidance by certain partnerships dealing with commodity futures will go back to 6 April 1976.
These were controversial measures and induced a response from Peter Rees MP who stated that retrospective legislation should only be introduced in limited circumstances and that certain safeguards should be provided. He suggested the following criteria:
- Any warning of retrospective tax legislation must be precise and identify exactly what the target is;
- The issues should immediately be referred to a technical committee in order to devise the precise legislative provisions;
- Once these provisions have been reached, draft clauses should immediately be published in advance of the Finance Bill;
- Without fail, the clause should be included in the next available Finance Bill
In a debate over the original provisions, Geoffrey Howe stated that these rules broadly described the constitutional convention that had arisen in this area over the years.
It seems that for many years these rules were adhered to and, in reality, there were few instances of legislation being backdated to a time before the announcements. Indeed, it was accepted that this would only be done in ‘exceptional cases’.
Darkest after the Dawn Primarolo
Although I was not born at the time of the debates which gave rise to the Rees Rules, I was in practice at the time Dawn Primarolo, then the Paymaster General, announced (“The Primarolo Statement”) that she was introducing measures to counter tax schemes seeking to provide tax efficient, or tax free, remuneration.
I remember that this statement set a whole flick of hares racing in the Big 4 firm I was working in at the time!
In this statement she described how HMRC and the Government were ‘not always able to anticipate the ingenuity and inventiveness of the avoidance industry’. In this regard, she was ‘giving notice of the Government’s intention to deal with arrangements that emerge in future’.
This was seen as problematic by the tax and legal professions for the three reasons set out in the ICAEW paper discussed above.
From a UK retrospective tax case law perspective, Huitson is the daddy.
The case concerned an independent contractor. He was resident in the UK and also carried out his trade, as an electrical contractor, in the UK.
He sought to avoid UK tax on his income through a marketed tax arrangement operated through the Isle of Man that aimed to take advantage of the Double Tax Treaty (“DTA”) between the UK and the Isle of Man.
Essentially, it was asserted that before the change in the legislation, the effect of the UK rules and the DTA when taken together was that the income was not subject to tax in either jurisdiction. So rather than being used to avoid double taxation, the DTA was being used to eliminate pretty much all taxation.
The taxpayer had used the scheme for seven years and had avoided income tax of almost £85k. There were approximately 2,500 other users of the scheme (or similar schemes).
As a result, the Government enacted legislation ‘setting things straight’ with retrospective effect.
The taxpayer sought a judicial review of this new legislation claiming that the retrospective changes failed to achieve a balance between the interests of individual taxpayer (Ie him and his fellow scheme users) and the general public and the measures were disproportionate. On that basis, they contravened his rights under ECHR.
The High Court, subsequently supported by the Court of Appeal, determined the following:
- The purpose of a DTA is to prevent double taxation and not to extinguish tax in both jurisdictions;
- It is a legitimate aim of the UK to ensure that its DTAs do no more than relieve double taxation and should not be permitted to avoid tax completely by those both resident and conducting business in the UK;
- The public policy enunciated in (2) is of such importance that it can be expected that Parliament will introduce legislation to stop any such abuse identified;
- The policy in (2) is of such importance that retrospective legislation is justified
As such, the Court had little sympathy for Mr Huitson and deemed the use of retrospective tax legislation lawful.
In March 2011, the Government first published a Protocol on the unscheduled announcement of changes to tax law.
This set out the criteria under which tax changes would be announced other than at the Budget.
However, for the purposes of this article it stated that:
‘The Protocol will explicitly recognise that changes to tax legislation where the change is effective from a date earlier than the date of announcement will be wholly exceptional’.
It is certainly arguable that such changes being ‘wholly exceptional’ is consistent with the decision in Huitson. In that case, the abuse of DTAs, the artificiality of the scheme and amount of tax at stake could all be factors in saying that it was an exceptional case.
In February 2012, David Gauke, then exchequer secretary to the Treasury, announced by written Ministerial Statement that the Government would introduce legislation to block arrangements created to avoid corporation tax on buy-backs of corporate debt.
The relevant legislation would apply to debt purchases that took place from the 1 December 2011, some three months prior to the announcement, meaning that it had retrospective effect. The written statement said:
“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.”
Here it is clear that the Government felt that the loss of tax that might emanate from the scheme justified a breach of the presumption that tax law should not be retrospective. As part of this thought process, it was felt that the immediate threat to the Treasury (and indirectly therefore the general public) was certainly a justification to pull the rug from under the feet of aggressive tax avoiders by means of retrospective tax legislation.
The schemes were operated by Barclays and resulted in a reported £500m being paid back to the Treasury. However, despite the gloss that these were highly novel schemes that HMRC had bravely suddenly stumbled across, at least one of these schemes was widely known and both had been formally disclosed to HMRC.
In this case, no decision to challenge the lawfulness of the retrospective tax legislation change appears to have been made. Perhaps this was in an attempt to not further sully the ‘reputation’ of the bank?
(Un)Saintly SDLT avoidance
Later that year in his budget speech delivered on 21 March 2012, the Chancellor, accompanied by a vigorous fist bashing on the despatch box, 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.”
So, it was clear. Changes would be made without notice and retrospectively. However, this did not stop a slew of scheme providers, with the encouragement of their barristers, slightly changing the mechanics of the target of the original legislation and coming up with a new scheme.
As was made clear by the above legislation, legislation was introduced in June of the following year to counter those new schemes, with retrospective effect to the March 2012. Of course, this retrospective tax legislation rendered those new schemes ineffective.
There was a challenge to this use of retrospective tax legislation in the High Court (St Mathews (West) Ltd and others) v HMRC  EWHC 1848 (Admin)). These challenges were both based on the changes being a breach of the taxpayer’s human rights and can be summarised as follows:
- Under Article 1, Protocol 1 (‘right to peaceful enjoyment of property’) of the ECHR they were deprived of the money they would have had if they would not have had to have paid it to HMRC; and
- Article 6 of the ECHR that the use of retrospective tax legislation deprived them of a hearing (a fair trial) as to the merits of the SDLT scheme
Both arguments were rejected by the High Court. Huitson was the reference point and was considered quite carefully in this case.
In respect of the first argument, the Court found that the thing they were deprived of was not money, nor any form of possession. Instead, all they had was a legal argument and this, regardless of the merits of the argument, was not a ‘possession’.
Furthermore, under Article 1, Protocol 1 domestic legislation is compatible where it is lawful and proportionate. The court considered that the changes were lawful and were not arbitrary. Whilst the amendments were retrospective in application it was clear that the Government had put taxpayers on notice that this might happen as part of Budget 2012. It was therefore foreseeable.
In respect of the second argument the Judge found:
‘little difficulty in reaching the conclusion that the legislation easily satisfies the higher test of compelling grounds in the public interest. The interference with the Claimants rights to air their arguments as to the effectiveness of this artificial tax avoidance scheme was proportionate and justified for… the reasons… already given for reaching the conclusion in respect of Article 1, Protocol 1…’
Going on to say that:
‘It was equally compelling justification for retrospective tax legislation that it would have the desirable effect that the relevant provisions of the FA2003 would operate in the manner Parliament intended.’
On this basis, the High Court refused permission for the taxpayer to seek Judicial Review of the legislation.
This case was slightly different to the Barclays scenario. Here, a very clear announcement was made by Mr Osbourne that can be paraphrased as ‘we have stopped your existing schemes – if you come up with something similar then we will also make sure that those changes are rendered ineffective from the same date’.
This should have been clear to those entering schemes, and certainly to those marketing the schemes, after the Budget.
April 2019 loan charge and retrospective tax legislation
There has been a lot of disquiet about the introduction of a simple PAYE charge on the users of so-called disguised remuneration schemes. This PAYE charge will apply to loans outstanding from third parties (eg EBT Trustees) as at 5 April 2019 and will apply to any loan taken out and not repaid since 1999.
Is the 2019 loan charge retrospective? At first glance it certainly is. One is being subjected to a tax charge that one could not have known about when the loan was taken out many years, or maybe decades, ago.
Alternatively, can it be claimed that the charge is ‘retroactive’? This is likely to be the defence offered by HMRC and the Government. My view is that it is retrospective and not retroactive.
If I am right, does it strike the right balance….is it proportionate?
Read my dedicated article about this pernicious charge where I discuss my thoughts in more detail.
If you would like to discuss retrospective tax legislation further with the team then please get in touch.