Clause 55
Finance Bill
9:45 am
Colin Breed (Shadow Minister, Treasury; South East Cornwall, Liberal Democrat)
I say at the outset that we accept entirely the need for the Government to legislate against tax avoidance. We appreciate that the provision is designed to prevent tax avoidance by United Kingdom taxpayers on income from foreign partnerships using Isle of Man or Channel Islands partnerships. It is based on an interpretation of the 1987 rule that was introduced following the Padmore case.
We support the Government’s efforts to deal with tax avoidance, but we still believe that, in principle, tax changes should apply prospectively and not retrospectively as set out under the measure. It has been the theme not only of some clauses this morning—it has been growing over the previous two Finance Bills, whereby the Government are making a determined effort to use retrospectivity as a tool for tax avoidance. While it was implemented in respect of a few things to begin with, it now seems to be creeping in in a new way. We are worried particularly by the effect of subsection (4), which will treat the new provisions as “always having had effect”.
As a result of the change, established tax law that has been on the statute book since 1970 has instantaneously been rewritten. Rewriting of legislation in such a way does not meet the legitimate expectation test. It sends out a damaging signal about the stability of the UK tax system, whereby business transactions made under one set of laws can then become subject to a different tax outcome at a later date due to the retrospective change in the rules. It is for that reason that the amendment would remove the measure.
Although we understand that the clause is directed primarily at transactions involving Isle of Man or Channel Islands partnerships, the European Union law principle of legitimate expectation needs to be respected. Taxpayers are entitled to understand the implications of a transaction that they enter into. Treating the provision as “always having had effect” runs contrary to Parliament’s intent over the past 30 years, which is to lay down rules whereby the tax effect of particular transactions can be changed or advance warning can be given of a change in the tax treatment in clearly identified circumstances.
In the late 1980s, an approach was adopted to counter a legal decision that had gone against the Revenue and which the Government wished to reverse. Although the new law was stated to “always having had effect”, it did not influence judicial decisions made before the new law was announced. A more recent approach was the statement made by the then Paymaster General to the effect that legislation would be introduced and be effective from 2 December 2004 in relation to what the Government consider to be unreasonable tax-avoidance schemes involving employment income.
Following that, in one of its report, the Treasury Committee said:
“The Inland Revenue should, without jeopardising their position, publish a paper setting out their thinking on the principles which will guide the way they implement”
the then Paymaster General’s announcement. Such a paper has never been published, but we believe that the philosophy underlying retrospective or retroactive legislation should now be examined in conjunction with the current move to introduce principle-based legislation. If the underlying purpose behind legislation or an area of tax law is articulated clearly, a taxpayer who respects that purpose should have certainty about the tax outcome of their particular transaction. If the underlying policy is to be changed, then any change should have effect only in relation to future transactions.
In summary, the application of the legitimate expectation test to this provision should be that any amendment applies only from the date that the change was announced—Budget day 2008. In respect of periods before that date, if HMRC believes that these interpretations are based on a wrong view of the law, they should be challenged through the courts. We believe an appropriate modus operandi should be agreed by the Treasury, HMRC and the representative bodies and then published for the benefit of all taxpayers.
My hope—and the other amendments in this group have a similar theme—is that the Government will live up to some of their promises, particularly in respect of the then Paymaster General’s announcement that we would get a paper of principles. It would enable us to understand this policy of retrospectivity, which commenced a few years ago and is almost going full steam ahead without that paper. The purpose of the amendment is to bring the matter to a head so that by the time we get to Report the paper that was announced a few years ago will have been published. We will then be able to judge the resultant clauses that the Government want to introduce in this Bill against that set of published principles.