UK anti-avoidance legislation in relation to double tax agreements with retrospective effect was held to be both proportionate and compatible with the taxpayer's right under the Human Rights Act 1998.

This case concerned a claim for judicial appeal brought by the taxpayer against UK fiscal legislation regarding double taxation relief which had retrospective effect. The claim was brought under the Human Rights Act 1998.

Facts

The taxpayer was a self-employed consultant and a resident of the UK for taxation purposes. His customers were all based in the UK.

In June 2001, the taxpayer entered into a tax avoidance scheme centred on the Isle of Man which took advantage of the United Kingdom – Isle of Man Double Taxation Agreement (“DTA”). The scheme basically resulted in the taxpayer no longer providing his services directly to end users in the UK. Instead a partnership incorporated and resident in the Isle of Man contracted directly or indirectly with the end user to provide the taxpayer's services. The partnership received full payment and in turn the taxpayer received a fixed fee of £15,000. He also received rewards for services supplied directly by him to end users in his capacity as the owner of a life interest in a trust which was established in the Isle of Man by the partners.

There was no dispute by either parties that the £15,000 was subject to UK tax. The tax-avoidance scheme focused on the income channelled through the trust to the taxpayer in his capacity as owner of a life interest. By exploiting the arrangements of the scheme the taxpayer avoided income tax of £84,980 over a 7 year period and reduced his effective rate of tax to 3.5%.

In his 2001/02 tax return, the taxpayer claimed relief from UK income tax under article 3(2) of the DTA on trust income. HMRC notified the taxpayer that this claim was likely to be challenged however no basis for the challenge was provided. Similar claims for relief were made by the taxpayer in the tax years 2002/03, 2003/04 and 2004/05. In February 2006, three years after the first disputed return, HMRC set out the reasons for the challenges to the claims for relief referring to the authority of Baker v Archer-Shee [1927]UKHL1; [1927] AC 844; [1926] 11 TC 749 and to section 739 ICTA 1988.

HMRC notified the taxpayer that a number of lead cases were prepared to take to the Special Commissioners regarding the validity of his claims to relief. Before the cases were listed, Parliament introduced section 58 of the Finance Act 2008 with retrospective effect. This section effectively provided that individuals, in a similar situation to the taxpayer, were liable to UK tax despite the provisions under the Isle of Man DTA.

The taxpayer challenged sections 58(4) and (5) of the Finance Act 2008 and contended that these sections were incompatible with Article 1 of the First protocol to the European Convention on Human rights. The basis for the taxpayer's challenge was that the sections changed the fiscal legislation regarding double tax relief with retrospective effect and that such retrospective amendment did not strike a fair balance as required under Article 1 of the Convention.

Decision

The Court declared that the legislation, although having retrospective effect, was in the current case proportionate and compatible with Article 1 of the First Protocol to the European Convention of Human Rights.

According to the Court, the rationale for the DTA in terms of public policy was that UK residents should pay UK income tax on the profits of any trade and profession. A DTA is intended to relieve from double taxation and is not an instrument to engage in tax avoidance.

There was no basis for a claim by the taxpayer that the Parliament's response was disproportionate. In the Court's view, the legislation was needed to put the effect of the DTA beyond doubt and to prevent taxpayers resident in the UK from exploiting the relevant DTA in a way that would substantially reduce their income tax. The retrospective application was justified in order to ensure a “fair balance” between the interests of all taxpayers. Given the background, and the need to ensure fairness, taxpayers should have reasonably expected that the legislative response would have retrospective effect.

According to the Court, the State was not obliged to test the matter first in the courts before enacting legislation, even with retrospective effect. In this case, the public policy was of such importance that the legislation was considered necessary.

The taxpayer claimed HMRC's failure to bring proceedings in respect of the arrangements rendered the Parliamentary response in section 58(4) dispro-portionate. This was rejected by the Court. HMRC had made it clear to taxpayers that it would challenge the arrangements and gave no assurance that it would not bring proceedings to recover tax. It was up to the taxpayers to assess the risk inherent in not paying the tax.

Further, the Court declared that the absence of any assessment of how individual taxpayers might have been financially affected by the liability imposed under section 58(4) could not affect the proportionality of the retrospective legislation.

The Court was not persuaded by the arguments put forward by the taxpayer and accordingly based on their findings; the taxpayer's claim for judicial review was dismissed.

The full judgment is available at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Admin/2010/97.html&query=R+and+(on+and+the+and+application+and+of+and+Huitson)+and+v+and+R&method=boolean