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

Retrospective fiscal legislation is not incompatible with Article 1 of the First Protocol merely because it is retrospective. The question is whether it strikes a fair balance between the community interest and individual property rights without imposing an unreasonable burden. A claimed tax relief is not a sufficiently established possession or legitimate expectation where it has neither been accepted nor adjudicated and remains the subject of a genuine dispute. The State may legislate retrospectively to prevent artificial use of a double taxation agreement for tax avoidance, particularly where residents reasonably expect to pay tax on trading income. There is no general legal requirement to litigate first or to conduct an impact assessment. The retrospective provisions in the Finance Act 2008 were proportionate and compatible with the Convention.

The appellant, a UK-resident IT consultant, used an Isle of Man partnership and interest in possession trust to claim relief from UK income tax under the UK-Isle of Man Double Taxation Agreement. Section 58 of the Finance Act 2008 retrospectively amended the legislation so that the arrangement no longer produced the claimed tax advantage.

The Administrative Court dismissed the judicial review claim, holding that the retrospective legislation was proportionate and compatible with Article 1 of the First Protocol: [2010] EWHC 97 (Admin); reported at [2011] 1 QB 174. The appeal concerned whether the retrospective amendments unlawfully interfered with the appellant’s possessions or legitimate expectations, having regard to proportionality, legal certainty, HMRC’s conduct and the absence of an impact assessment.

1. Appeal dismissed. Lord Justice Mummery gave the judgment, with which Lord Justices Sullivan and Tomlinson agreed. The Administrative Court’s decision was upheld.
2. Article 1 of the First Protocol protects possessions, but retrospective fiscal legislation is not prohibited as such. The court must assess all relevant circumstances and determine whether the measure strikes a fair balance between the general interests of the community and individual rights. In economic and social matters the State has a wide margin of appreciation and Parliament has a correspondingly broad discretionary area of judgment. The decisive limit is that the individual must not bear an unreasonable burden.
3. The claimed tax relief had not been accepted by HMRC or established by any court or tribunal. It remained the subject of a genuine dispute, supported by respectable arguments on both sides. It therefore did not provide a sufficiently established proprietary claim or legitimate expectation of the kind relied upon. In construing the relevant tax legislation, the court endorsed a purposive approach under which the statutory provisions and transaction are viewed realistically, referring to Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454 at [35].
4. The retrospective amendments pursued a legitimate fiscal policy. Residence is the core connecting factor for income taxation, and UK residents could reasonably expect to pay UK tax on profits from their trade or profession. Double taxation arrangements are intended to relieve double taxation, not to facilitate avoidance or reduce tax below the ordinary level. Parliament was entitled to prevent the artificial use of the arrangement for that contrary purpose and to legislate retrospectively.
5. HMRC was under no legal obligation to test the scheme’s efficacy in litigation before legislation was enacted. HMRC had given no assurance that proceedings would precede legislation or that any legislation would be prospective. Its advice to pay tax on account, and the taxpayers’ ability to bring proceedings under section 28A of the Taxes Management Act 1970, were relevant. The circumstances were materially different from Beyeler v Italy (2000) 33 EHRR 1224.
6. There was no legal requirement for HMRC to carry out a formal or informal impact assessment before retrospective legislation. The number of affected taxpayers and the tax at stake were sufficiently known, and the absence of an assessment did not make the legislation disproportionate. The amended provisions therefore achieved a fair balance and were compatible with Article 1 of the First Protocol.

• Court of Appeal (Civil Division) dismissed the appeal and upheld the Administrative Court’s decision: [2011] EWCA Civ 893.
• High Court of Justice, Queen’s Bench Division, Administrative Court dismissed the judicial review claim and held that the retrospective provisions were proportionate and compatible with Article 1 of the First Protocol: [2010] EWHC 97 (Admin); [2011] 1 QB 174.