Retrospective taxation and Section 58(4) of the Finance Act 2008
A briefing note for parliamentarians and policy makers
Note: Documentary evidence is referred to throughout this briefing [square brackets] for ease. Full copies of these documents are available at
Overview
Many people arrange their individual or business tax affairs as efficiently as possible within the confines of the law. Tax planning measures are transparent and fully reported to HMRC. In the event of disagreement between HMRC and a taxpayer, there is a well established route to resolving disputes through the tax courts.Should HMRC decide to close down tax loopholes, the changes are normally applied prospectively, It is generally accepted that retrospective tax changes, where people are punished for something that was legal at the time, should only be used in exceptional circumstances andwhere clear warning has been given in advance [K020, I002].
However, recently there have been occasions where schemes have been closed down retrospectively and without warning, even though doing so contravened generally accepted Parliamentary principles. One such retrospective change,Section 58(4) of the Finance Act 2008[N005], has left over 3,000 people facing bankruptcy through unexpected tax demands (including up to 50% interest) going back to 2001.The circumstances applying here are not exceptional, and no warning that retrospective action would be taken was ever given, until after the event [G002 page 4, H004].
Retrospective taxation and S58(4) of the Finance Act 2008
In 2008 the Government published Budget Note 66 (BN66) [N010]indicating their intention to introduce Section 58(4) ofthat year’s Finance Act, whichtargeted tax planning schemes that made use of double taxation treaties to reduce tax payable. These schemes were mainly marketed to freelancersand contractors after the introduction IR35 as they offered more certainty than would be the case if running a limited company. They were legal and transparent, and were notified to HMRC under the disclosure rules (DOTAS).
The case against S58(4)
When bringing in the retrospective changes through S58(4), HMRC claimed that BN66 was simply aclarification of an existing piece of retrospective legislation, Clause 62(2) of the Finance Act 1987, known as ‘Padmore’. However, detailed examination of Hansard reveals that the schemes dealt with under Padmore were materially different to those affected by S58. Padmorewas concerned with arrangements made using foreign partnerships, which are different "legal entities"to those dealt with by BN66.The Chancellor at the time, Norman Lamont, said that Padmorewas onlyintended to apply to “a very restricted class of person – partners in foreign partnerships” [E005].
BN66 argued that Padmore created a precedent which justified the retrospective nature of S58(4), regardless of the clear differences between the two tax planning schemes. This is despite the fact that not until February 2008 didHMRC claim Padmoreactually appliedin the schemes caught out under S58(4) [H006].Indeed, as far back as July 2002, HMRC issued an internalTechnical Exchange (TN63) [I007],which confirmed their recognition that the scheme was becoming widespread and could not easily be challenged. More interestingly, HMRC had actually published details of the scheme in their own 1993 Tax manual [I009].
By bringing in S58(4), the Government ignored the accepted practice to only apply retrospective tax legislation in areas where HMRC had already announced that it would do so in the future. This breached both the ‘Rees Rules’ (clear warning must be provided), and the ‘Dorrell doctrine’, which states that retrospective legislation should only be used in very exceptional cases.The only exceptional element of this situation is that despite a. HMRC's recorded knowledge of the potential for the scheme to be used in 1993, b. their recorded knowledge of its legitimacy and "unchallengability" in 2002, and c. thousands of tax returns being submitted (referencing the scheme) between 2001 and 2007 [H005], they chose to take no action to permanently close down this loophole until 1st November 2007 [I009].
Following publication of BN66, the Government received vociferous objections from various professional bodies. The Chartered Institute of Taxation called S58(4) “extreme and unjustified”. The Law Society stated it was “wrong in principle”, and the Institute of Chartered Accountants stated that it sent out a damaging signal about the stability of the UK tax system[P005, F004, F005]. These representations were totally ignored, despite their provenance.
The Parliamentary debate around S58(4)
When S58(4) was debated in Parliament [G002], the Minister at the time, Jane Kennedy, was "unaware" of the extent of the opposition to this clause [G002 page 13] and the large number of people who had been encouraged by HMRC’s failure over the previous seven years to challenge the scheme in the tax courts to assume that it was perfectly legal. Jane Kennedy has since confirmed in writing that she did notrealise that so many people would be affected, and has encouraged victims to write to their MPs urging HMRC to examine every case[K005]. She has also now kindly advised this campaign as to how it can meet its objectives and has offered her support in liaising with current MPs.
S58(4) was opposed by several prominent Shadow Ministers, including David Gauke, now the Exchequer Secretary, who said that the retrospection was unacceptable and that, once in power, the Conservatives would look at the practicalities of repealing it [K010]. The Liberal Democrats also sought in vain to amend the clause to remove its retrospective elements [N007]. George Osborne wrote "the legislation ought to apply prospectively....the [Labour] Government has been aware of this scheme for some years yet made no move to close the loophole. This served to create a legitimate expectation ...that the practice would be tolerated...and so people have been arranging their tax affairs accordingly". David Cameron wrote: "Retrospective legislation should only be used in exceptional circumstances...we intend to table amendments to appeal to remove the retrospective nature..." Vince Cable wrote in equally strong terms [K019]
The implications of S58(4) were considered so far reaching that two scheme promoters challenged the validity of Parliament’s right to introduce such retrospective legislation. Although the Judicial Review and subsequent Court of Appeal hearing confirmed Parliament’s supremacy to introduce retrospective legislation, the evidence revealed in the hearings highlighted that the information laid before Parliament when the Bill was passed in 2008 lacked the full background necessary to make an informed judgement, including the previous (but hitherto undisclosed) acknowledgement by HMRC in 2002 that the scheme was perfectly lawful [I009].
Most critically, HMRC singularly failed to conduct their standard Impact Assessment into this scheme; given that S58(4) has notably been acknowledged (by the Court of Appeal and now by HMRC themselves) to be purely retrospective, and given that HMRC managed to convince Parliament to avoid invoking the Rees Rules (again using their erroneous "clarification" argument) then the absence of such an assessment is profoundly concerning, and demonstrates a gross omission during the pre-legislative process [K017].
Consequences of S58(4)
Most of the scheme's users were IT contractors, self employed consultants and healthcare workers. Faced with unexpected back demands for tax, often totalling tens and hundreds of thousands of pounds, many families are now suffering with depression, divorce and stress linked to the clear and present threat of bankruptcy. Their circumstances range from severe, to catastrophic [J004].
The arbitrary and use of retrospective tax legislation against the clear principles laid down in the Rees Rules also sends out mixed signals to individuals and companies who wish to invest and settle in the UK and create job opportunities, thus undermining confidence in the rule of law which is an essential component of a competitive economy; it openly contradicts the Government’s stated intention to create a more simple and fairer tax system.
Current situation
The standard reply [H006, A005, I009] which has been sent to MPs who make enquiries to HMTreasury/HMRC on this subject states that “the court has decided” on S58(4). However, this is erroneous since, as mentioned above, the Judicial Review and Court of Appeal only ruled that the legislation was not in breach of human rights law and confirmed that Parliament retained the right to act retrospectively. The court did not(and was not asked to) pass judgement on whether HMRC misled Parliament into passing S58(4)or the technical tax arguments involved (that is the job of the Tax Tribunal Courts) [B002].
The current standard response to MPs also states that “HMRC made it clear throughout” that the schemes closed down by BN66 didn’t work. Again, this is wholly inaccurate. HMRC only conveyed its view to users that it did not accept the validity of the schemes in May 2007 [H004], and according to testimony by Simon Davis, Assistant Director of HMRC at the High Court hearing of ‘Huitson vs. HMRC’, first claimed that Padmore applied in this instance in February 2008 [I009]. Jane Kennedy herself, in the2008 Finance Committee debate openly confirmed that "HMRC has not consistently made the case throughout that the scheme did not work" [G002 page 4, H006]
The solution
While we acknowledge the right of Parliament to amend tax legislation, the retrospective nature of these changes is clearly contrary to Parliamentary and HMRC protocols [K020, I002] and more importantly, it is clear that Parliament was not in possession of the full facts when it passed the legislation. We are calling on Parliament to amend S58(4) of the Finance Act 2008, to change the wording from “as always having had effect” so that it reads “to have effect from 12th March 2008”. This would bring the Finance Act in line with the Rees Rules and HMRC protocol, and mean that tax liabilities would only accrue from the moment the intention was announced to close the affected schemes through publication of BN66, and not for the period during which they were considered by HMRC to be operating legally. It would also give victims the ability to fight their case in the relevant tax courts, which is an option that S58(4) currently denies them.
About the No To Retro Tax campaign
No To Retro Tax is a campaign group organised and supported by individuals affected by the retrospective elements of Section 58(4) of the Finance Act 2008. We are campaigning for Parliament to amend S58(4) to remove the retrospective elements of the legislation.
For more information, please contact Alistair Renshaw at No To Retro Tax, 222 Southbank House, Black Prince Road, London SE1 7SJ; Telephone: 020 7138 3228; Email: ; Twitter: @No2RetroTax; Website:
No To Retro Tax
May 2012
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