Bills drawn to the special attention of each
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 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,
closing down a tax loophole, are in breach of human rights laws
because they are retrospective in effect and are unwarranted and
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. 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.
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 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:
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
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
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
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."
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."
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.
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.
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
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,
now section 58 of the Finance Act 2008.
Section 58 of the Finance Act
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."
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
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
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
1 HC Bill 122 Back
Clauses 66 and 67. Back
ITEPA 2003 ss. 346, 348 and/or 555. Back
ITEPA s. 11. Back
Clause 67. Back
Twelfth Report of 2003-04, Scrutiny of Bills: Fifth Progress
Report, HL Paper 93/HC 603, at paras 1.43-1.50. Back
Twelfth Report of Session 2003-04, above, at para. 1.39. Back
Explanatory Note to Clause 66, para. 7. Back
Explanatory Note to Clause 67, para. 6. Back
PBC (Bill 090), 16 June 2009, cols 420 and 426-432. Back
PBC 16 June 2009, cols 428, 432 Back
Clause 55. Back
Explanatory Notes to clause 55 of Finance Bill 2008, para. 17. Back
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
HC Deb 20 May 2009 col 1400W. Back