The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change. Blogs are published twice per week, on Monday and Thursday. Read David's previous blog on world comparisons of tax complexity. You can follow David on Twitter @TaxSimplifier.
Most would agree that we should manage without retrospective tax legislation if possible. A citizen is entitled to know the tax consequences of what he does at the time of doing it.
But are there circumstances in which it is justified to depart from this principle, and make new tax law which applies to past transactions?
In the past the answer to this question was always a resounding “no” - retrospective legislation was unacceptable. Indeed judges used to say that a charge to tax could only be levied where that was the unambiguous interpretation of current law.
But as the tax code has grown more complicated, the position of the citizen has become more compromised. The way current tax law applies might only be discovered after years of wrangling in the courts.
And now we have several precedents for retrospective legislation, adding to this uncertainty.
A significant example was the windfall tax imposed by the new Labour Government in 1997 on the privatised utilities. The stated justification for this tax was that these companies were sold to the public too cheaply. One could clearly respond to this argument by saying that whatever the merits of the valuation argument, private citizens are expected to stand by a contract that they have entered into, and Government should do the same.
In February last year the Treasury announced that it would take retrospective action against two avoidance schemes undertaken by Barclays - the necessary legislation being expressed to take effect from 1st December 2011. The tax charged as a consequence was in the region of £500m.
The Treasury lobbied India not to apply retrospective legislation to Vodafone, after the Indian courts had decided that Vodafone had successfully avoided about £2bn under existing Indian tax law with an offshore tax scheme to acquire an Indian business. The Barclays case has not gone unnoticed in Delhi, weakening the strength of the Treasury’s argument.
The retrospective issue surfaced again in last year’s budget, this time in connection with the imposition of higher rates of stamp duty on properties worth more than £2m, and combatting the use of companies to hold property to avoid stamp duty by transferring shares in the company rather than transferring the land itself.
This is what George Osborne said in his budget speech:-
“Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament. I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned.”
But unfortunately there are real difficulties with this statement. It raises the obvious question of what ways round the new rules would be “inappropriate”. Since the required rules were not included in the legislation, one has to assume that it could not be identified in advance what is “inappropriate”.
In order to avoid a tax charge, the taxpayer needs to do something different to what is charged. A good tax professional will explore how, for example, higher stamp duty charges might be avoided by transactions which are substantively different to the transactions caught by the law. The possibility of retrospective legislation means that what many would see as a legitimate attempt to adapt what one does to take into account tax law may be shrouded with uncertainty as to its tax effects.
Taxpayers may think of overturning retrospective tax under Human Rights law, but it is not easy to succeed with this. The Court of Appeal recently held (in a case involving overseas partnerships) that the issue was whether the retrospective law achieved ‘…a fair balance between the interests of the community and the rights of the individual’. It was held in this case that the balance lay with the community.
But it seems clear that retrospective legislation could not be countenanced in other legal areas, such as criminal law, even though this might have clear practical advantages. For example, Abu Qatada could perhaps have been tried and convicted in the English courts had certain anti-terrorism laws been enacted earlier than they were.
Unhappily the precedent has now been established in tax. It would be very difficult for anyone who has been party to this precedent to argue in principle against retrospective tax law in the future.