In R (oao Huitson) v HMRC (CA – 25 July), an individual (H), who was resident in the UK, sought to avoid income tax by supplying his services to UK clients through an Isle of Man intermediary.
He claimed double taxation relief under the UK/Isle of Man Double Taxation Agreement (although his income from the Isle of Man intermediary was not charged to tax in the Isle of Man).
HMRC rejected his claims, and he appealed. While the appeals were pending, Parliament enacted FA 2008 s 58, with retrospective effect. H applied for judicial review, contending that s 58 contravened the European Convention on Human Rights.
The QB rejected this contention and dismissed his application. Kenneth Parker J observed that the arrangements which H had entered into ‘had no genuine commercial purpose’ and were ‘artificial’. He also noted that F(No 2) A 1987 s 62 had previously been enacted to counter a somewhat similar avoidance technique (see Padmore v CIR (No 1), CA 1989, 62 TC 352) and had retrospective effect.
He observed that this should have ‘sent out a clear signal to taxpayers and their advisers that the legislature would be very likely to take effective and decisive steps to counter, even with retrospective measures, any attempt, through artificial arrangements, to take advantage of a double taxation agreement’.
He held that Parliament had been entitled ‘to legislate with retrospective effect, particularly in order to ensure a “fair balance” between the interests of the great body of resident taxpayers who paid income tax on their income from a trade or profession in the normal way, and the taxpayers, like the claimant, who had sought to exploit, by artificial arrangements, the DTA’.
The CA unanimously upheld this decision. Mummery LJ held that the relevant provisions of FA 2008 were proportionate and compatible with the Convention, and 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 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’.
The CA reached a similar decision in R (oao Shiner) v HMRC (CA – 25 July), where individual (S), who was resident in the UK, had established a settlement in 2005, aimed at taking advantage of what he perceived as a loophole in the UK/Isle of Man Double Taxation Agreement.
Mummery LJ also observed that, on the evidence, it did not appear that there had been any ‘movement of capital’ falling within Article 56EC. (The CA heard the case with R (oao Huitson) v HMRC, summarised above.)
Why it matters: FA 2008 s 58 introduced amendments to ICTA 1988, TCGA 1992 and ITTOIA 2005, intended to prevent the use of foreign partnerships by UK residents. The CA unanimously upheld the validity of the legislation.
In R (oao Huitson) v HMRC (CA – 25 July), an individual (H), who was resident in the UK, sought to avoid income tax by supplying his services to UK clients through an Isle of Man intermediary.
He claimed double taxation relief under the UK/Isle of Man Double Taxation Agreement (although his income from the Isle of Man intermediary was not charged to tax in the Isle of Man).
HMRC rejected his claims, and he appealed. While the appeals were pending, Parliament enacted FA 2008 s 58, with retrospective effect. H applied for judicial review, contending that s 58 contravened the European Convention on Human Rights.
The QB rejected this contention and dismissed his application. Kenneth Parker J observed that the arrangements which H had entered into ‘had no genuine commercial purpose’ and were ‘artificial’. He also noted that F(No 2) A 1987 s 62 had previously been enacted to counter a somewhat similar avoidance technique (see Padmore v CIR (No 1), CA 1989, 62 TC 352) and had retrospective effect.
He observed that this should have ‘sent out a clear signal to taxpayers and their advisers that the legislature would be very likely to take effective and decisive steps to counter, even with retrospective measures, any attempt, through artificial arrangements, to take advantage of a double taxation agreement’.
He held that Parliament had been entitled ‘to legislate with retrospective effect, particularly in order to ensure a “fair balance” between the interests of the great body of resident taxpayers who paid income tax on their income from a trade or profession in the normal way, and the taxpayers, like the claimant, who had sought to exploit, by artificial arrangements, the DTA’.
The CA unanimously upheld this decision. Mummery LJ held that the relevant provisions of FA 2008 were proportionate and compatible with the Convention, and 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 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’.
The CA reached a similar decision in R (oao Shiner) v HMRC (CA – 25 July), where individual (S), who was resident in the UK, had established a settlement in 2005, aimed at taking advantage of what he perceived as a loophole in the UK/Isle of Man Double Taxation Agreement.
Mummery LJ also observed that, on the evidence, it did not appear that there had been any ‘movement of capital’ falling within Article 56EC. (The CA heard the case with R (oao Huitson) v HMRC, summarised above.)
Why it matters: FA 2008 s 58 introduced amendments to ICTA 1988, TCGA 1992 and ITTOIA 2005, intended to prevent the use of foreign partnerships by UK residents. The CA unanimously upheld the validity of the legislation.
