Legislative Scrutiny: Finance Bill; Government Response to the Committee's Sixteenth Report of Session 2008-09, Coroners and Justice Bill (certified inquests) - Human Rights Joint Committee Contents

Government Bills

Bills drawn to the special attention of each House

1  Finance Bill
Date introduced to first House

Date introduced to second House

Current Bill Number

28 April 2009

HC Bill 122


1.1 The Bill[1] was introduced in the House of Commons on 28 April 2009 and completed its Committee Stage on 25 June. Report Stage is scheduled for 7 July.

The human rights issue

1.2 Members of our Committee have received representations from a firm of tax advisers, NT Advisors, to the effect that certain anti tax-avoidance provisions in the Bill,[2] closing down a tax loophole, are in breach of human rights laws because they are retrospective in effect and are unwarranted and inappropriate.

1.3 Tax avoidance schemes must be notified to Her Majesty's Revenue and Customs ("HMRC") under the Disclosure of Tax Avoidance Schemes rules. Where HMRC decides to close down an avoidance scheme, it makes an announcement that it intends to do so and the scheme is then closed down prospectively, i.e. from the date of the announcement.

1.4 On 12 January 2009 HMRC announced that it was to take action to "prevent deductions being allowed where liabilities relating to an employment are incurred by employees and former employees with a main purpose of avoiding tax" and where the scheme came within any one of 3 specified sections of the Income Tax (Earnings and Pensions) Act ("ITEPA") 2003.[3] The changes were the subject of a Written Ministerial Statement tabled by the Financial Secretary to the Treasury on 13 January 2009.

1.5 On 1 April 2009 HMRC made a further announcement that a tax loophole would be closed, which was of a wider scope than the 12 January announcement, extending to schemes which came under a different section of ITEPA.[4] The changes were the subject of a Written Ministerial Statement tabled by the Financial Secretary to the Treasury on 1 April 2009.

1.6 The Finance Bill gives effect to both of these announcements, with effect from 12 January 2009, the date of the first announcement. The representations made to us argue that the provision which makes the 1 April announcement take effect from 12 January[5] is in breach of human rights law because it is unjustifiably retrospective. It is said that the avoidance scheme closed down by the 1 April announcement was "substantively different" from those closed down on 12 January, and that there is therefore no justification from departing from the usual rule that changes to taxation should be prospective not retrospective. They argue that "ex post fact legislation is bad legislation no matter what the issue since it is a fundamental requirement that legal frameworks provide certainty for individual behaviour at the point of that behaviour and not retrospectively."

1.7 Our predecessor Committee set out the approach which human rights law requires to be taken to retrospective taxation in its Twelfth Report of 2003-04[6]:

    it is well established in Convention case-law that taxation is an interference with the rights guaranteed under [Article 1 Protocol 1 ECHR].

    1.46 However, taxation is prima facie justified under the second paragraph of Article 1 of Protocol No. 1, which expressly reserves the right of States to enforce such laws as they may deem necessary to secure the payment of taxes. The Court of Human Rights has accorded States a very wide degree of latitude in relation to taxation under the second paragraph of Article 1 of Protocol No. 1, but it is not unlimited: the second paragraph must be construed in the light of the principle laid down in the first sentence of the Article. To be lawful under Article 1 of Protocol No. 1, therefore, even a taxing measure … must satisfy the requirements of legal certainty and proportionality.

    1.47 For an interference to be lawful under the second paragraph of Article 1 of Protocol No. 1, it must satisfy the qualitative requirements of accessibility and foreseeability: the law which imposes the tax must be published, intelligible and generally available in a form which enables the individual to organise their affairs knowing with reasonable certainty the consequences of acting in different ways.

    Such a [retrospective] tax would require very careful scrutiny for compatibility with the requirement of accessibility and foreseeability.

1.8 However, retrospective taxation is not automatically in breach of Article 1 Protocol 1, as our predecessor Committee pointed out in the same report:

    … the requirement of legal certainty in Article 1 of Protocol No. 1 does not amount to an outright prohibition on retrospective taxation. In National Provincial Building Society v UK, for example, the Court held that a taxation measure which had been enacted with retroactive effect did not violate Article 1 of Protocol No. 1 because the interference was justified.

1.9 We agree with our predecessor Committee's analysis of the position under human rights law, that retrospective taxation requires carefully scrutiny for its justification, but it is capable of being justified by sufficiently strong arguments.

The Government's justification

1.10 The Explanatory Notes to the Bill do not include a section dealing with the Bill's compatibility with the ECHR. This was the subject of adverse comment by our predecessor Committee in its 2004 Report on the Finance Bill cited above, in which it said:[7]

    We remind Ministers that statements of compatibility under s. 19(1)(a) of the Human Rights Act 1998 should only be made after careful consideration of the human rights implications of the Bill, and that the Explanatory Notes to the Bill should record the reasoning behind the conclusion that the provisions of the Bill are compatible with the Convention rights. The Treasury is not exempt from the need to explain itself in such a way.

1.11 We agree and we repeat the recommendation that the Treasury include an analysis of human rights compatibility in the Explanatory Notes accompanying Finance Bills.

1.12 The Explanatory Notes on the relevant clauses state that the clause giving effect to the changes announced on 12 January 2009 "counters avoidance involving the abusive use of deductions for employment-related liabilities and is introduced in response to arrangements that involve the creation of a contrived liability through deliberate default."[8] The clause giving effect to the changes announced on 1 April 2009 is explained as being intended to "counter avoidance involving the abusive use of reliefs available for losses associated with employment. They are introduced in response to arrangements that involve the creation of a loss through deliberate default and are a variant of tax avoidance arrangements using relief for employment-related liabilities, for which counter-measures were announced on 13 January 2009."[9]

1.13 The Government's justification for backdating the 1 April changes to 12 January was explained in greater detail by the Financial Secretary to the Treasury, Rt Hon Stephen Timms MP, in Public Bill Committee.[10] He explained that early in 2009 HMRC received information about "a particularly abusive avoidance scheme, which relied on deliberate default to generate artificial liabilities, which are then set against the otherwise taxable income of the individual concerned at a potential cost to the Exchequer of about £200 million." On 12 January he therefore announced the closure of the scheme "to head off this threat to the public finances." Following the January announcement, HMRC received further information that a variant of the scheme, this time involving the legislation on employment-related losses, was being used to similar effect at a potential loss to the public purse of £200 million. So the Minister announced on 1 April that this variant of the scheme would also be closed down, but with effect from 12 January. That the second scheme was very similar to the first and was also "particularly abusive", involving the artificial creation of contrived losses to avoid tax, was expressly accepted by Mr. Gauke MP who moved an amendment in Public Bill Committee to remove the Bill's retrospective effect.[11]

1.14 The Minister explained that the variant scheme that was closed down in April was "a highly similar scheme set up by the same provider, using the same approach and aimed at exactly the same people." He accepts that the fine detail of the second scheme was somewhat different from that of the first, and that there is therefore a degree of retrospection, but he argues that retrospective effect was justified in the circumstances by the striking similarity between the two schemes. The underlying approach of both schemes is the same: the individual seeking tax relief against genuine income for a contrived loss that the individual never actually suffered. The second loophole was a variant on the one closed down in January, featuring the same individuals who therefore would have known exactly what they were entering into when they decided to do so.

1.15 The backdating of the clause is also said by the Government to be essential to preserve the intent and effect of the January announcement: if it were not backdated, it would put at risk the £200 million saving to the Exchequer, because all those individuals whose had moved to the variant scheme prior to 1 April would have been able to crystallise the artificial losses to claim against their taxable income. Without backdating, there would therefore have been a loss to revenue of £200 million, because the 600 individuals involved would have been able to claim that amount in tax relief. In the words of the Financial Secretary to the Treasury in Public Bill Committee:

    "That is unfair. That is what honest taxpayers are worried about. They are worried that people who know exactly what they are doing and who employ the services of highly paid advisers to devise those ingenious schemes are, by that route, avoiding paying tax like the rest of us."

Assessment of compatibility

1.16 In view of the close similarity of the two schemes, the fact that it is not in dispute that it was a particularly abusive scheme involving tax relief for contrived losses, the fact that the individuals entering into the scheme were aware of the closure of the earlier scheme and of the nature of what they were entering into, the substantial cost to the Exchequer, the limited degree of retrospectivity and the absence of any evidence of personal hardship caused by the retrospectivity of the relevant provision, we consider that the Government has discharged the burden of demonstrating that the limited degree of retrospectivity involved in clause 67 of the Bill is, in the circumstances, justified. We therefore do not propose to subject these provisions to any further scrutiny.

1.17 We find it regrettable, however, that the Government did not provide a more detailed explanation of its justification for making the clause retrospective in the Explanatory Notes to the Bill, or, even better, in a separate Memorandum dealing specifically with any retrospective taxation provisions. We take this opportunity to draw to Parliament's attention that we have also received large numbers of representations complaining about the retrospective effect of a taxation provision in last year's Finance Bill,[12] now section 58 of the Finance Act 2008.

Section 58 of the Finance Act 2008

1.18 The Explanatory Notes accompanying the 2008 Finance Bill explain that the relevant clause is intended to counter a tax-avoidance scheme purporting to exempt from UK tax income received by UK resident individuals by using certain provisions in the UK's bilateral Double Taxation Treaties. Legislation was introduced in the Finance (No. 2) Act 1987 which provided that a Double Taxation Treaty did not affect UK residents' liability to UK tax on their share of income or gains from a foreign partnership. The avoidance scheme targeted by the 2008 provision purports to get round the 1987 legislation. The Government says that the 2008 provision was intended merely to put beyond doubt that the effect of the legislation has always been that where UK residents are members of foreign partnerships nothing in any Double Taxation Treaty affects their tax liability, and that the UK individuals "remain liable to UK tax despite the elaborate, artificial structure designed to exempt them."[13] The purpose, the Government says, was merely to make clear that none of those schemes had ever had the effect of avoiding tax that was claimed for them. It would appear to be the case, however, that such schemes have been in existence for a number of years, with HMRC's knowledge, but HMRC had not sought to close them down until the 2008 Finance Bill.

1.19 We have received evidence to the effect that, as a result of this provision, more than 2000 people are now facing tax demands going back up to 7 years, along with punitive interest charged for late payment. Most of these people are freelance workers, such as IT contractors, project managers, and oil and gas engineers. The impact on many of these individuals and their families appears to be severe. According to a survey of those affected,[14] conducted between 1st and 5th June 2009, 57 said they could not meet the tax demand, even if they sold all of their assets including their family home, and a further 29 could only settle by selling or remortgaging their family home. A number of people face personal bankruptcy. The related financial worry is causing mental health problems and marital breakdown.

1.20 In a Written Answer dated 20 May 2009, the Financial Secretary to the Treasury, Stephen Timms MP, states that the 1987 Act "retrospectively restored the principle" that double taxation treaties do not affect a UK resident's liability to UK tax on their income or gains, and that s. 58 of the Finance Act 2008 was designed to put beyond doubt that none of the avoidance schemes relying on double taxation treaties in fact circumvented that principle.[15] Asked what impact assessment HMRC had made of the effect of the closure of the schemes by s. 58, he said that "formal impact assessments are not published in respect of measures where the impact is only on those who are avoiding tax and thus one was not published for this particular measure." He estimated that the tax at stake on these schemes was around £200 million.

1.21 The representations we have received argue that the changes made by s. 58 of the 2008 Act are in breach of Article 1 Protocol 1 ECHR because they are retrospective in effect and no adequate justification for such retrospectivity has been provided.

1.22 Applying the approach set out above, these representations raise the question whether the Government has provided a sufficient justification for closing down this tax avoidance scheme with what amounts to retrospective effect. The evidence of the hardship caused to a number of individuals, taken at face value, suggests that the Government failed to carry out the necessary assessment of the impact that such a retrospective taxation measure would have on the individuals affected. In the absence of a satisfactory justification for retrospection, there is therefore at least an arguable breach of Article 1 Protocol 1. Indeed, it appears that some of those affected have been granted permission for a judicial review by the High Court. We have therefore written to the Minister asking for a memorandum setting out a detailed assessment of the impact of the measure on those affected, and the Government's detailed justification for the retrospective effect of s. 58 of the Finance Act 2008.

1.23 We cleared last year's Finance Bill from scrutiny without raising any human rights concerns with the Government. No representations were received at the time about the retrospectivity of the relevant provision and nothing was received from the Government identifying the provision as having retrospective effect and explaining the Government's justification for such retrospectivity. Finance Bills are invariably lengthy and highly technical in nature. In the absence of a memorandum or representations from those directly affected, it is almost impossible to identify provisions which raise human rights questions in such bills in the time available.

1.24 We recommend that in future the Government provide our Committee with a Memorandum accompanying the Finance Bill, identifying any provisions in the Bill which have retrospective effect, together with an assessment of the impact of the retrospective provision and a detailed explanation of the justification for the retrospectivity.

1   HC Bill 122 Back

2   Clauses 66 and 67. Back

3   ITEPA 2003 ss. 346, 348 and/or 555. Back

4   ITEPA s. 11. Back

5   Clause 67. Back

6   Twelfth Report of 2003-04, Scrutiny of Bills: Fifth Progress Report, HL Paper 93/HC 603, at paras 1.43-1.50. Back

7   Twelfth Report of Session 2003-04, above, at para. 1.39. Back

8   Explanatory Note to Clause 66, para. 7. Back

9   Explanatory Note to Clause 67, para. 6. Back

10   PBC (Bill 090), 16 June 2009, cols 420 and 426-432. Back

11   PBC 16 June 2009, cols 428, 432 Back

12   Clause 55. Back

13   Explanatory Notes to clause 55 of Finance Bill 2008, para. 17. Back

14   Survey of those affected by s. 58 Finance Act 2008 by Mr Nigel Jagger: see summary in written evidence. A copy of the survey will be deposited in the Parliamentary Archives. Back

15   HC Deb 20 May 2009 col 1400W. Back

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