HUITSON v. THE UNITED KINGDOM
Inadmissible
Guido Raimondi;Krzysztof Wojtyczek;Ledi Bianku;Nona Tsotsoria;Päivi Hirvelä;Paul Mahoney
The applicant, Mr Robert Huitson, is a British national, who was born in 1958 and lives in Stockport. He was represented before the Court by Devonshires Solicitors, lawyers practising in London. 1. The applicant is a qualified electrical engineer and worked as a self-employed Information Technology (“IT”) consultant. The end users of his services were based in the United Kingdom. He would ordinarily account for income tax on the taxable profits of his trade or profession in the United Kingdom. 2. On 20 June 2001 the applicant became a client of Montpelier Tax Consultants (Isle of Man) Limited (“Montpelier”). Montpelier provided advice to the applicant with respect to a marketed tax avoidance scheme (“the scheme”) centred on the Isle of Man seeking advantage of the United Kingdom-Isle of Man Double Taxation Arrangement 1995 (“the DTA”). 3. As a result of the scheme, the applicant no longer supplied his IT consultancy services directly to his end-user clients based in the United Kingdom. Instead, an intermediary, the Allenby Partnership (“the Partnership”), which was constituted by five companies incorporated and resident in the Isle of Man, contracted, directly or indirectly with the end-users to provide the applicant’s services. The intermediary received full payment for such services and the applicant received an annual fee of GBP 15,000 (or less) from the intermediary. The rest of his reward for his services was received only in his capacity as the owner of a life interest in a Trust established in the Isle of Man and of which one of the Partnership companies was the trustee. 4. Until the relevant legislation was amended with retrospective effect, the applicant contended that, as a result of the DTA and the legislation then applicable, the income channelled through the trust was not subject to United Kingdom income tax. Nor, apparently, was it subject to Manx tax, since the beneficiary (the applicant), unlike the trustee, was not resident in the Isle of Man. The effect of the use of the DTA meant that the applicant was able to reduce his effective income tax rate to an average of 3.5%. 5. In his tax return for the period 2001/2002, the applicant claimed relief from income tax in the sum of GBP 20,350.90 representing trust income. Relying on domestic jurisprudence, the applicant’s case was that the profits received by the trustee as a partner were not treated as belonging to the trustee but to the beneficiary with an interest in possession under the trust, with the consequence that the income arising from his beneficial interest in possession under the trust could not be assessed to United Kingdom tax. 6. Her Majesty’s Revenue and Customs (“HMRC”) first wrote to the applicant regarding his use of the tax avoidance scheme on 4 December 2003. In that letter he was informed that HMRC was likely to challenge the validity of the claim. No basis for the challenge was mentioned. The applicant was advised to make payment on account in respect of the disputed sum, so as to avoid the accrual of interest and the incurrence of a possible penalty. It appears that he chose not to do so. 7. Similar correspondence followed in respect of tax years 2002/2003, for which the applicant claimed relief of GBP 27,350; 2003/2004, for which he claimed relief of GBP 32,405.71, and 2005, for which he claimed relief of GBP 38,250. 8. On 14 February 2006, HMRC set out reasons for the challenges to the claims of relief, and on 16 May 2007 it informed the applicant that it was preparing a number of lead cases to take to the Special Commissioners regarding the validity of the claims to the DTA. 9. However, before the cases were listed, the United Kingdom Government announced, in its Budget of 12 March 2008, proposals to introduce what became section 58 of the Finance Act 2008 (“the 2008 Act”), which came into force on 21 July 2008. Section 58 of the Finance Act of 2008 amended with retrospective effect the existing legislation in section 858 of the Income Tax (Trading and Other Income) Act 2005. Any assessment to income tax (in the absence of fraud or negligence) was limited to six years, so that the retrospective effect of section 58 extended no further back than to the tax year 2001/2002. The effect of this change of legislation was to render the scheme ineffectual and to impose on the applicant and others in a similar position liability to pay United Kingdom income tax on trust income received in past years. 10. HMRC revised the applicant’s tax assessments accordingly. The revisions and the validity of the legal basis on which they were made were challenged by the applicant by way of legal proceedings. 11. The applicant brought judicial review proceedings in the High Court against HMRC on 21 October 2008. At this stage his outstanding tax liability was more than GBP 100,000. He sought to challenge sections 58(4) and (5) of the 2008 Act under the Human Rights Act 1998. His ground of challenge was that these sections 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 Article 1 of Protocol No. 1 of the European Convention on Human Rights and the jurisprudence of the European Court of Human Rights. 12. On 28 January 2010 Mr Justice Kenneth Parker dismissed the claim, finding that the challenged legislation, although having retrospective effect was, in the relevant circumstances, proportionate and compatible with Article 1 of Protocol No. 1. 13. The applicant appealed to the Court of Appeal, which heard the matter over three days in November 2010, and judgment was delivered on 25 July 2011. Lord Justice Mummery giving the lead judgment dismissed the appeal, finding that the High Court judge had not been wrong to conclude that the retrospective provisions of the 2008 Act were proportionate and compatible with Article 1 of Protocol No. 1. Mummery LJ noted that the applicant had taken advantage of a marketed tax avoidance scheme for no other purpose than the avoidance of United Kingdom income tax. According to him, 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 achieved a fair balance between the interests of the general body of taxpayers and the right of the applicant to the enjoyment of his possessions, without imposing an unreasonable economic burden on him. Moreover, the legislation prevented the DTA tax relief provisions from being misused for a purpose different from their originally intended use. On the issue of prior test litigation, Mummery LJ upheld Parker J’s finding that there was no legal obligation on the State to test the matter of the efficacy of the scheme in the courts before enacting legislation. Moreover, taxpayers were not powerless to bring the issue to a head themselves (under provisions in s.28A of the Taxes Management Act 1970) without waiting for HMRC to bring proceedings in respect of the arrangements. They did not pursue such a course. Concerning a possible pre-legislation assessment of the impact of retrospectivity on the taxpayers concerned, Mummery LJ found in the circumstances such an assessment would not have yielded any relevant information which HMRC did not already know. 14. At this stage, the figure of the tax relief the applicant was ultimately deprived of was in the region of GBP 195,000. According to Mummery LJ, this liability was no more an unjustified interference with his enjoyment of his possessions than the ordinary liability that his fellow residents in the United Kingdom were under a duty to contribute, by way of United Kingdom tax on their income, towards the costs of providing community and other benefits for the purposes of life in a civil society. 15. On 7 February 2012 the Supreme Court of the United Kingdom denied permission to appeal. 16. United Kingdom-Isle of Man Double Taxation Arrangement 1995 (“the DTA”): “3 (2) The industrial or commercial profits of a Manx enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as is attributable to that permanent establishment.” 17. Section 858 of the Income Tax (Trading and Other Income) Act 2005 provided as follows: “858 Resident partners and double taxation agreements. (1)This section applies if— (a) a UK resident (“the partner”) is a member of a firm which— (i) resides outside the United Kingdom, or (ii) carries on a trade the control and management of which is outside the United Kingdom, and (b) by virtue of any arrangements having effect under section 788 of ICTA (“the arrangements”) any of the income of the firm is relieved from income tax in the United Kingdom. (2) The partner is liable to income tax on the partner’s share of the income of the firm despite the arrangements. (3) If the partner’s share of the income of the firm consists of or includes a share in a qualifying distribution— (a) made by a UK resident company, and (b) chargeable to tax under Chapter 3 of Part 4, the partner (and not the firm) is, despite the arrangements, entitled to the share of the tax credit which corresponds to the partner’s share of the distribution.” 18. Section 58 of the Finance Act 2008 provides as follows: “UK residents and foreign partnerships. (1) In section 115 of ICTA (partnerships involving companies: supplementary), after subsection (5B) insert— “(5C) For the purposes of subsections (5) to (5B) the members of a partnership include any company which is entitled to a share of income or capital gains of the partnership.” (2) In section 59 of TCGA 1992 (partnerships), insert at the end— “(4) For the purposes of subsections (2) and (3) the members of a partnership include any person entitled to a share of capital gains of the partnership.” (3) In section 858 of ITTOIA 2005 (resident partners and double taxation agreements), insert at the end— “(4) For the purposes of this section the members of a firm include any person entitled to a share of income of the firm.” (4) The amendments made by subsections (1) to (3) are treated as always having had effect. (5) For the purposes of the predecessor provisions, the members of a partnership are to be treated as having included, at all times to which those provisions applied, a person entitled to a share of income or capital gains of the partnership. (6)“The predecessor provisions” means— (a) section 153(4) and (5) of the Income and Corporation Taxes Act 1970 (c. 10) (as it had effect under section 62(2) of F(No.2)A 1987), and (b) sections 112(4) to (6) and 115(5) of ICTA.” 19. On the same day as the Court of Appeal gave judgment in the applicant’s case, the same three judges gave judgment in the case of R (Shiner & Anor) v. HMRC C1/2009/08. The claim in that case was for a declaration that the amendments in section 58 of the Finance Act 2008 were incompatible with Article 56 of the TFEU (Treaty on the Functioning of the European Union), as well as Article 1 of Protocol No. 1 of the European Convention on Human Rights. The claimants in that case argued that the amendments made by section 58 were capable of preventing, restricting or discouraging commercial investment of capital in foreign partnerships by means of unjustified discrimination between an investment of capital in a foreign partnership and an investment of capital in a United Kingdom partnership. They argued that its retrospectivity was an infringement of the European Union principles of legal certainty and legitimate expectation. The complaint was dismissed.