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In Huitson, R (on the application of) v Revenue and Customs [2011] EWCA Civ 893, the Court of Appeal ruled that retrospective legislation does not breach a tax avoider’s human rights.

Electrical contractor Robert Huitson used a marketed offshore tax avoidance scheme involving a partnership and a trust in order to take advantage of double tax treaties between the UK and Isle of Man.

The electrical engineer avoided IR35 and paid very low rates of tax as a result of the scheme implemented by Montpelier Tax Consultants. HMRC closed this loophole with section 58 Finance Act 2008, but the new measures applied with retrospective effect.

Huitson claimed that HMRC had Breached his human rights in assessing him for over £100,000 in back taxes because at the time he participated in the scheme HMRC knew about the loophole but it had failed to act.

The case went to the High Court in January 2010 where Judge Kenneth Parker decided against the taxpayer. 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.

An appeal was allowed in November 2010 and in July 2011  Lord Justices Mummery, Sullivan and Tomlinson sitting in the Court of Appeal confirmed the findings of the earlier court.

The outcome is an important one for HMRC because the Court has now provided a clear analysis of the human rights position, something long overdue in relation to this kind of retrospective legislation. It can only serve to assist it in its battle to tackle aggressive tax avoidance schemes.

Lord Justice Mummery said: 

Judge Parker “was not wrong to conclude in his comprehensive, clear and excellent judgment that the retrospective provisions of the 2008 Act are proportionate and are compatible with Article 1 (of the European Human Rights Act). There are no grounds which would entitle this court to disturb it.

In the circumstances of this case, the liability of the claimant under the retrospective legislation of s.58 to pay the UK income tax that he would have had to pay if he had not participated in the tax avoidance scheme, is no more an unjustified interference with his enjoyment of his possessions than the ordinary liability that his fellow residents in the UK are under to contribute, by way of UK tax on their income, towards the costs of providing community and other benefits for the purposes of life in a civil society.

In summary, the crucial points on examination of all the relevant circumstances of this case are that the retrospective amendments were enacted pursuant to a justified fiscal policy that was within the State's area of appreciation and discretionary judgment in economic and social matters. The legislation achieves a fair balance between the interests of the general body of taxpayers and the right of the claimant to the enjoyment of his possessions, without imposing an unreasonable economic burden on him. This outcome accords with the reasonable expectations of the taxation of residents in the State on the profits of their trade or profession. The legislation prevents the DTA tax relief provisions from being misused for a purpose different from their originally intended use. There has been no conduct on the part of the State fiscal authorities that has made the retrospective application of the amended legislation to his tax affairs an infringement of his Convention rights.”

Links

IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

Non-resident trusts 
How do you tax an offshore trust? What are the consequences of setting up a trust? What are the issues for settlors?

 

External links

Huitson, R (on the application of) v Revenue and Customs [2011] EWCA Civ 893