R (Huitson) v HM Revenue and Customs; [2010] EWHC 97 (Admin); [2010] WLR (D) 11

REVENUE — Income tax — Tax avoidance — Claimant participating in scheme taking advantage of Double Taxation Arrangement between United Kingdom and Isle of Man — Amending legislation rendering scheme ineffectual — Whether retrospective operation of amendment infringing claimant’s right to peaceful enjoyment of possessions — Human Rights Act 1998 Sch 1, Pt II, art 1 — Finance Act 2008, s 58(4),(5)

R (Huitson) v HM Revenue and Customs

[2010] EWHC 97 (Admin); [2010] WLR (D) 11

QBD: Kenneth Parker J: 28 January 2010

It was within the permissible area of discretionary judgment of Parliament, and compatible with art 1 of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, to legislate with retrospective effect to prevent taxpayers from seeking to use, by wholly artificial arrangements, a Double Tax Arrangement such as existed between the United Kingdom and the Isle of Man for a purpose for which it was not intended, so as to defeat the public policy that such an arrangement should do no more than relieve from double taxation.

Kenneth Parker J so held when dismissing a claim for judicial review brought by the claimant, Robert Huitson, against the defendant, Her Majesty’s Revenue and Customs (“HMRC”), which challenged s 58(4) and (5) of the Finance Act 2008 as being incompatible with the Human Rights Act 1998. The claimant was a self-employed IT consultant who was, and at all material times had been, a resident of the United Kingdom for the purposes of taxation; the end users of his services were all based in the United Kingdom. As such, he would ordinarily have accounted for income tax on the taxable profits of his trade or profession under the domestic legislation applicable to UK residents. On 20 June 2001 the claimant became a client of Montpelier Tax Consultants (Isle of Man) Ltd (“Montpelier”). Montpelier provided advice to the claimant (and many other UK residents) with respect to a tax avoidance scheme centred on the Isle of Man, which sought to take advantage of the Double Taxation Arrangement (“the DTA”) between the United Kingdom and the Isle of Man. The claimant’s services were provided through an intermediary and payments for those services were channelled to the claimant through a trust and were not subject to UK income tax. The claimant’s ground of challenge was that the relevant provisions of the 2008 Act changed fiscal legislation regarding double taxation relief with retrospective effect, and that such retrospective amendment did not strike a fair balance as required by art 1 of the First Protocol to the Convention and the jurisprudence of the European Court of Human Rights relating to that article.

KENNETH PARKER J said that, although permission to bring the claim had previously been refused on the papers, after oral argument on the renewed application it had seemed right to allow an opportunity for the claim to be heard, especially in view of the fact that the relevant legislation was retrospective and there was a considerable public interest in the ramifications for both social and fiscal policies. The tax avoidance scheme, if it worked, would appear to realise every taxpayer’s dream of lawfully avoiding, or at least greatly reducing, income tax in any jurisdiction. It would be singularly attractive to any person in the position of the claimant who, as a self-employed person, carried on a trade or profession in the United Kingdom. Even though many would not take advantage, such a tax avoidance scheme could be expected to have a very significant “bandwagon” effect, as was corroborated by figures produced by HMRC.

The submission made on behalf of HMRC (and not seriously disputed by counsel for the claimant) that the elaborate arrangements entered into were artificial, in that they had no genuine commercial purpose, and would not have been entered into other than for the purpose of tax avoidance, was correct. It was within the permissible area of discretionary judgment of Parliament to legislate, with retrospective effect, to prevent taxpayers from seeking, by wholly artificial arrangements, to use a DTA such as existed between the United Kingdom and the Isle of Man for a purpose for which it was not intended, so as to defeat the public policy the importance of which had already been brought home to taxpayers and their advisers by the legislative response following Padmore v Inland Revenue Comrs [1987] STC 36; affirmed [1989] STC 493. The fundamental purpose of DTAs was to avoid double taxation, and it was a legitimate and important aim of UK public policy in fiscal affairs that a DTA should not be permitted to become an instrument by which persons residing in the United Kingdom avoided, or substantially reduced, the income tax that they would ordinarily pay on their income, including income earned from the exercise of a trade or profession. The failure of HMRC over a long period to take appropriate proceedings in respect of the arrangements did not render the retrospective legislative response disproportionate: the state was not obliged to test the matter first in the courts before enacting legislation, even with retrospective effect. The public policy was of such paramount importance that legislation was necessary in any event to put the position beyond all doubt. Furthermore, the taxpayers did not have to wait until HMRC brought legal proceedings in respect of the arrangements. It had been open to any affected taxpayer to apply to the special commissioners for a direction under s 28A (4) of the Taxes Management Act 1970 and appeal against an adverse decision. The absence of any assessment by HMRC of how individual taxpayers might be affected financially by s 58(4) of the 2008 Act could not, in the circumstances of this case, affect the proportionality of the retrospective legislation. The challenged legislation, although having retrospective effect, was in the circumstances proportionate and compatible with art 1 of the First Protocol and, accordingly, the claim was dismissed.

Appearances: David Elvin QC and James Ramsden (instructed by Hextalls LLP) for the claimant; Rabinder Singh QC and Clive Sheldon (instructed by HMRC Solicitor’s Office) for HMRC.

Reported by: Alison Crail, barrister