Huitson, R (on the application of) v Revenue and Customs

Retrospective tax legislation is not incompatible with Article 1 of Protocol No 1 merely because it imposes liability for past periods. The court must assess whether, in the circumstances, it imposes an unreasonable burden and fails to strike a fair balance. Taxation is an area in which Parliament enjoys a wide margin of appreciation, particularly where legislation counters artificial arrangements designed to exploit double taxation relief and substantially reduce ordinary residence-based taxation. Parliament is not generally required to await the outcome of test litigation before legislating. Earlier retrospective legislation may also be relevant because it gives taxpayers notice of the risk of further retrospective measures.

The claimant, a UK-resident self-employed IT consultant, used an Isle of Man partnership and trust arrangement advised by Montpelier Tax Consultants. He claimed that income received through the arrangement was relieved from UK income tax under the United Kingdom–Isle of Man Double Taxation Arrangement.

HMRC disputed the arrangement and advised payment on account. Before the underlying tax issues were determined by the Special Commissioners, section 58 of the Finance Act 2008 retrospectively amended the relevant legislation to include persons entitled to a share of partnership income among the members of a firm.

The claimant sought judicial review under the Human Rights Act 1998, contending that sections 58(4) and (5) were incompatible with Article 1 of the First Protocol to the European Convention on Human Rights because they retrospectively imposed substantial tax liabilities.

1. The claim was dismissed. Sections 58(4) and (5) of the Finance Act 2008 were compatible with Article 1 of Protocol No 1.
2. Article 1 of Protocol No 1 requires a fair balance between the general interest and the protection of property rights. Retrospective tax legislation is not prohibited as such. The question is whether its application in the claimant’s circumstances imposed an unreasonable burden. Parliament enjoys a wide margin of appreciation in taxation and social and economic policy.
3. The central public policy was legitimate and important. Double taxation arrangements are intended to relieve double taxation, not to facilitate complete non-taxation or allow UK residents to reduce tax on UK trade or professional income below the ordinary residence-based liability. Parliament was entitled to prevent artificial arrangements from producing that result.
4. The uncertainty of the pre-existing law did not make the legislation disproportionate. The competing arguments concerned the interpretation of “profits of a Manx enterprise”, the effect of Archer-Shee, section 739 of the Income and Corporation Taxes Act 1988, and the meaning of “member of a firm” in section 858 of the Income Tax (Trading and Other Income) Act 2005. The court considered that litigation would have been complex, costly and uncertain.
5. Parliament was not required to await judicial determination before legislating. HMRC had consistently challenged the arrangements and had given no assurance that legislation would be prospective only. Taxpayers could themselves have sought closure notices under section 28A of the Taxes Management Act 1970.
6. The absence of an individual financial-impact assessment did not make the legislation disproportionate. Taxpayers had been placed on notice of the dispute and had chosen whether to reserve funds or accept the risk of spending or investing the money. Potential hardship could be considered by HMRC when enforcing liabilities, but did not invalidate the legislation.