Can HM Revenue & Customs (HMRC) legislate with retrospective effect? The courts are unsure. What now HMRC's strategy for dealing with tax avoidance schemes?
The Appeal Court is deciding whether HMRC can legislate with retrospective effect in order to combat a tax avoidance scheme. If the court finds against HMRC it could cast doubts over some of HMRC’s methodology for spotlighting and legislating against other well-known avoidance schemes.
Robert Huitson an IT consultant set up a family trust in the Isle of Man in order to exploit what was to become a popular loophole using a combination of partnerships and double taxation agreements.
HMRC was aware of the existence of these schemes for several years but for whatever reason was slow to act, only moving to counteract them with anti-avoidance legislation in section 58 of the 2008 Finance Act. The new rules were enacted with retrospective effect.
When HMRC caught up with Mr Huitson it assessed him for back taxes of £100,000.
Mr Huitson, as is the case with a great number of other individuals had found that the concept of paying no Income Tax on his UK earnings was an attractive idea. As the scheme was legal until the introduction of s.58 the consultant spent and apparently enjoyed the benefit of his tax savings. He has now accused HMRC of violating his human rights.
Rabinder Singh QC, representing HMRC, pointed out to the court that users of the avoidance scheme were warned well in advance that it was under review and argues that the retrospective change in the law was "proportionate and compatible" with human rights.
The Appeal Court thinks that Mr Huitson may well have a case and is reserving judgment for a later date.
This seems unlikely to be the end of the matter as from past experience these cases drag on for years.
There is also an application for judical review brought by another group of taxpayers affected by section 58 (see Shiner & Anor). Update: This application was refused and the decision to refuse it was upheld by the FTT, the Upper Tribunal and in January 2018 the Court of Appeal.
What now for HMRC’s spotlights on tax avoidance?
HMRC lists certain tax avoidance schemes that are in its "spotlights". Many onlookers have questioned the point of this practice and if the court now finds that retrospective legislation is contrary to a taxpayer’s Human Rights, it will cast further doubts on HMRC’s tax avoidance strategy.
Perhaps the most controversial spotlight is the Employer Funded Unapproved Retirement Benefit Scheme (EFRBS) which is now a standard feature of Premier League football contracts as it can ensure that foreign players can avoid UK taxes and UK players can enjoy the tax benefits when they retire abroad. HMRC claims that these schemes do not work, however, under the doctrine of prevailing practice it seems improbable that HMRC would be unable to levy tax penalties on anyone using such a scheme before the date that either it fights and wins a test case, or changes the law.