I read with interest the recent article in the Telegraph about Robert Huitson, an IT consultant, who has been landed with a £100K tax bill (others have also received backdated bills) as the result of retrospective changes made to tax legislation.Mr Huiston set up Isle of Man trusts to avoid British income tax.
The scheme was entirely legal and ran for seven years until Parliament closed the loophole retrospectively in the 2008 Finance Act, and issued backdated demands for millions of pounds.
Changing the law to close "loopholes", and prevent them being used in the future, is one thing. However, retrospectively applying those laws to tax arrangements set up legally and in good faith is contrary to the fundamentals of British law.
David Elvin QC is acting on Mr Huiston's behalf in the Appeal Court and is challenging the retrospective law, on the basis of a breach in human rights for people to be allowed to have "free enjoyment" of their private property.
"The degree of retrospectivity is unprecedented in the history of tax legislation and imposes an individual and excessive burden on users of the (tax avoidance) arrangement."
It will be very interesting to see how this case progresses.
Tax does have to be taxing.
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I assume you're talking about this article? I hope you're not going to get back out of the good habit of including references! ;)
ReplyDelete"in good faith" - this hits the nail on the head. The whole point is that, frequently, loopholes are exploited (or are sometimes claimed to exist when they don't necessarily - schemes often rely on a novel interpretation of legislation which is subsequently found in court to be incorrect) to produce a tax result that is different from that which parliament intended given the commercial/economic reality. It is often hard to see how such schemes could be considered to be entered into in good faith.
This was an arrangement that was advertised as giving people an effective 10% take rate by using a complex series of transactions involving Isle of Man trusts. For people who took advantage of the scheme to now present themselves in the press as innocents who are suffering HMRC-imposed uncertainty over their tax affairs is hilarious.
"contrary to the fundamentals of British law" - there's a review of the recent(ish) history of retrospective tax legislation here. As such legislation has been tested and upheld by the courts it is difficult to see how it is contrary to such fundamentals. Elvin argues that the "degree of retrospectivity is unprecedented" and European Human Rights law remains a bit of a moving feast, so this could go either way. I agree with you that it will be interesting to see how the case progresses.
1. Parliament passed a law.
ReplyDelete2. People obeyed that law, were responsible and took professional advice to ensure they complied with the law, to legally minimise the amount of tax than they are legally obliged to pay.
3. The state now wishes to penalise them for their actions, despite the fact that they obeyed the intent of parliament.
No doubt parliament had incompetent advisers, HMRC, but that doesn’t make it right for the state to penalise law abiding taxpayers for their own mistakes.
"No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores" Lord Clyde
ReplyDelete10:05,
ReplyDelete1. Parliament passed a law.
2. People entered into a series of transactions (described here) designed to produce a tax result that was different from that which Parliament intended. They took professional advice to try ensure that the arrangements were within the letter of the law; the courts have not yet ruled on whether or not they were.
3. Taking advice from HMRC, Parliament enacted further legislation to ensure that the people were taxed in the way it intended when it enacted the original law.
4. This further legislation was retroactive. In previous instances where retrospective tax legislation has been enacted, it has been ruled that this is legitimate where such action is proportionate and the scheme(s) the legislation seeks to address produce(s) tax results contrary to Parliament's original intent.
5. In the present case, the High Court held that the use of retrospective legislation was legitimate. Leave was granted to appeal the decision.
6. In addition to the right of appeal through the courts (possibly ultimately to the European Court), the introduction of the retrospective legislation was subject to normal democratic accountability in Parliament.
The case continues.
12:39,
ReplyDeleteI'm sure I don't have to tell you that the next sentence of the judgement you've quoted reads:
"The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket."
In other words, the taxpayer's at it and the Revenue's at it too...but both are perfectly entitled to be at it.
Fortunately, there have been some rather more illuminating judgements handed down since 1929!
Playing it a little fast and loose with "illuminating" aren't you? LOL.
ReplyDeleteEven the courts struggled with Ramsey for 20 years (MacNiven)!
Basic Logic.
ReplyDeleteIf Parliament changes the law in order to stop people doing something then quite obviously they were obeying the law and therefore paying their correct taxes.
If Parliament/HMRC were incompetent in the first place then they should recognise that fact, get rid of the incompetent advisers who appear to surface everytime a new piece of legislastion comes around, then replace them with professional people who's intent is to act fairly and within the law.
0950 - Haha! OK, I'll put my hands up to that one!
ReplyDelete0958,
Your use of the word "incompetent" in this context suggests an inaccurate perception of what these schemes are all about. We're not talking about a gaping loophole here! In this case, as in many schemes, we're talking about a complex series of transactions in conjunction with a novel interpretation of the legislation. Remember that the courts have not yet ruled on whether the scheme works - in other words they've so far reserved judgment on whether there is actually a loophole. As the decision will be made at the Appeals Court level (at least) then, if the scheme does work then the least we will be able to say is that it was a very close thing. Under the circumstances I cannot agree that, even if the scheme is held to be successful, this is due to incompetence on the part of those involved in putting together the legislation.
There are of course, unfortunately, frequent occasions where tax legislation is drafted in such a way as to leave what could (loosely) be described as gaping loopholes. You will usually never get to hear about these because HMRC's enquiries into schemes that exploit them are quietly dropped and the loopholes are usually (only slightly less quietly) fixed by new legislation. In my opinion, the main reasons these actual gaping loopholes appear are:
- Much of the tax system is overly complex and there hasn't been the political will to fundamentally reform it so anti-avoidance legislation all-too-often constitutes sticking-plaster solutions.
- While I acknowledge this sounds a bit too much like "it's not fair", the under-resourced tax professionals at HMRC with responsibility for writing tax legislation are up against large numbers of highly-resourced, highly-paid and, frankly, very clever lawyers and accountants both in the UK and abroad who spend their careers trying to find and exploit loopholes.
- The government gets aggressively lobbied by interest groups who wish to water down tax legislation and create and/or perpetuate loopholes.
- Arguably, some governments are ideologically in favour of allowing certain loopholes to continue.
If you want to add HMRC incompetence, then fine. My point is to differentiate this sort of loophole from a Huitson-type scenario and I'm already so off topic that I'm not going to argue.
The other thing that distinguishes the Huitson example from the gaping loopholes I've discussed above is that it would not be possible to enact retroactive legislation in the latter. As I've said, a prerequisite for retroactive legislation is that the scheme being targeted produces a result different from that intended by Parliament. The meaning of "the intention of Parliament" has been tested at length in court and is far from straightforward, but it can be loosely paraphrased as "what a reasonable person reading the legislation would infer that Parliament's intention was". It follows that, if there is a gaping loophole, retroactive legislation couldn't be enacted.