The Loan Charge Judicial Review – Zeeman & Murphy v HMRC
The High Court recently dismissed two claims for judicial review in respect of the controversial 2019 Loan Charge legislation backed by the Loan Charge Action Group (“LCAG”) and represented by Robert Venables QC.
The basis for the claim was that the loan charge deprived taxpayers of their right to the peaceful enjoyment of their possessions per Article 1 of Protocol 1 (“A1P1”) of the Human Rights Act. It was held that the taxpayers were always subject to a claim on their possessions by HMRC which prevented the loan charge from falling within A1P1.
Even if the provision were engaged, there remained a high hurdle for the claimants to evidence that the legislation was disproportionate to their individual protections. By virtue of the presence of tax avoidance and the decision in Rangers, it was held that the legislation is not disproportionate and the fell squarely within the state’s entitlement to enact such legislation.
Why Was There a Case?
The Loan Charge was – in its original form – a controversial and aggressive piece of legislation which represented the increasingly hollow expectation that tax legislation is not retrospective. The mechanics of the charge – bringing all loans outstanding to be taxable in a single year – in most cases placed a significantly greater burden on taxpayers than would have been the case if the loans had been taxable in the tax year they were made.
As such, the judicial review was brought on the basis that the legislation interferes with taxpayers rights to the peaceful enjoyment of his possessions. It was argued by the claimants that by levying a charge based on transactions entered into in the previous 20-years, this imposed a significant and disproportionate interference on the taxpayers right to peaceful enjoyment of their possessions.
A1P1 of the Human Rights Act states that:
‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provision shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest to secure the payment of taxes or other contributions or penalties’
Did the Human Rights Act Apply?
In order for the provisions to apply, one must establish that:
- The taxpayer was being deprived of their possessions;
- The deprivation of those possessions is not proportionate
It is recognised that a charge to tax may interfere with an individual’s enjoyment of money, and therefore engage the provisions.
However, a ‘possession’ does not include something over which there is a legitimate expectation of a claim to that possession. In this case, that legitimate claim was held to be that HMRC had a ‘powerful’ argument that the tax was payable. This seems to be based on the decision in Rangers handed down a couple of years ago in the Supreme Court.
Of course, it was held in Rangers that the contribution of funds created the tax point rather than the making of the loan.
In essence, the courts held there was no ‘possession’ as the funds always subject to a realistic claim by HMRC. As such, it was held that the Human Rights protections were not engaged at all.
What Would Happen If A1P1 was Engaged?
The courts went on to consider what the position would be had there been some ‘possession’. The question is then whether the deprivation of those possessions is proportionate and strikes a fair balance between the demands of the general interests of the community and the protection of the individual’s fundamental rights.
On the face of it, the loan charge is not proportionate as it sought to:
- Place a significant burden on taxpayers by potentially taxing 20-years’ worth of transactions in a single tax year thus subjecting the taxpayers to a greater liability than would have been the case;
- It allowed HMRC to pursue taxpayers outside of their statutory time limits – which in many cases, was the result of a failure to act by HMRC;
- The leading case law on the matter remained patchy – much of which was the foundation for legislative change;
…but the court disagreed.
Recognising a state’s right to enact legislation, the test for whether that legislation is ‘disproportionate’ is high – ‘legislation will only be regarded as infringing A1P1 rights if it can be shown to be “manifestly without reasonable foundation”’
Taking a ‘real world’ approach, the courts ruled that the taxpayer had directly or indirectly received remuneration. They found that the:
‘imposition of the tax has not changed; all that the loan charge does is alter the timing of the payment. Especially in the light of the evidence that DR schemes were not declared in the past’
‘This legislation is not ‘manifestly without reasonable foundation’ but on the contrary, it falls squarely within the margin of appreciation afforded to the state’
The decision of this case is rooted in the fact that:
- There was no ‘possession’ for the purposes of A1P1 as any possession was subject to a claim by HMRC based on the decision in Rangers; and
- Any deprivation of possession would have been within the remit of the Government and not be disproportionate.
Unfortunately, the decision fails to address a number of relevant and important matters including HMRC being out of time to collect the tax due. The court had clearly lacked any sympathy for the taxpayers and, as is often the case in avoidance cases, took a hardline approach in relation to the issues at hand with the underlying justification of ‘avoidance’.
Indeed, the failure to address that HMRC were out of time to raise assessments suggests that other legislation enacted to provide HMRC with a ‘get out’ could be deemed proportionate when combating avoidance. As such, taxpayers entering avoidance arrangements could be see the concept of ‘finality’ becoming increasingly fluid.
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