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Renshaw AlistairAlistair Renshaw is a chartered surveyor and chairman of the 'No to Retro Tax' campaign, which campaigns against the use of retrospective legislation in the UK.

The American statesman and senator from Massachusetts Daniel Webster once wrote that an unlimited power to impose tax involves, necessarily, the power to destroy. There has been much written in the past few days about tax avoidance and the need for everyone to pay their fair share in these times of austerity.  However, in the wake of the budget, any sensible discussion about the level of tax burden the country can stand is being drowned out by politicians playing to the gallery and demanding harsher and more draconian punishments against that perpetual class enemy, “the rich”.

Many people arrange their individual or business tax affairs in as efficient a manner as possible within the confines of the law. This is different from tax evasion, which is a deliberate and criminal attempt to avoid paying what is owed. There are strict statutory rules which dictate that, once a structure is implemented to minimise tax liabilities, the scheme is notified to HMRC under the Disclosure of Tax Avoidance Schemes rules, so they can monitor its use and consider whether it is line with the intentions of Parliament. In the event of a disagreement between HMRC and the affected taxpayer over the interpretation of tax legislation, there is a well established route to resolving disputes through the tax courts, with Parliament free to legislate if the Government feels loopholes need to be closed down.

The most important feature of any tax system is legal certainty. It is generally accepted that retrospective tax changes – where people incur demands for additional liabilities and are fined for arranging their affairs in a manner that was entirely legal at the time – should only be used in the most exceptional circumstances, and even then, only when clear warning has been given in advance under the Rees rules. Retrospection damages confidence in the rule of law, which is an essential component of a competitive economy in a globalised world, and by undermining the principles of stability and uncertainty, reduces the attractiveness of the UK as a place to invest and do business.


The detrimental impact of retrospective changes to tax legislation has been recognised by none other than Chancellor George Osborne, who recently warned his Indian counterpart Pranab Mukherjee that proposals to impose additional capital gains tax liabilities going back fifty years on anyone carrying out business in that country – a measure that would land British companies such as Vodafone with an additional £1.4bn tax bill – would harm the investment climate in India.

However, the Chancellor should remember that what is good for India is also good for the United Kingdom. Not only did this year’s Budget apply retrospective changes to the rules on corporation tax, but Indian officials were able to point to Section 58(4) of the Finance Act 2008 as an example of the UK doing exactly the same thing that Osborne was castigating India for. Section 58 targeted tax planning schemes that made use of offshore trusts and double taxation treaties to reduce tax paid by the scheme’s users. They were heavily marketed to freelancers and contractors after the introduction of IR35 as they offered more certainty about liabilities than would be the case if running a limited company. They had been reported under the disclosure rules, and, as acknowledged by HMRC in 2002, there were no grounds to challenge their use in the tax courts as they were legal and transparent.

By bringing in Section 58, the Government not only changed the law so that these schemes could not operate in future, but it also made them effectively unlawful for the whole period they had been in operation. At a stroke, this removed the option for people who used these schemes to challenge the decision to close down the schemes in the tax courts. More seriously, some 3,000 people, many of them self-employed or contractors on modest or uncertain incomes, are now being aggressively pursued by HMRC for additional tax payments and interest imposed retrospectively over many years, and face bankruptcy and losing their homes as a result.

When Section 58 was debated in Parliament, the Exchequer Secretary David Gauke (then a shadow Treasury minister) strongly opposed the retrospection, as did the Liberal Democrats. Since then, the Minister at the time, Jane Kennedy, has also stated that she did not realise what the impact of the legislation would be, and has encouraged anyone who has been affected to write to their MP and have HMRC examine every case. The retrospection was the subject of vociferous objection from various professional bodies. The Chartered Institution of Taxation called it “extreme and unjustified”. The Law Society said it was “wrong in principle”, while the Institute of Chartered Accountants said that it sent out a damaging signal about the stability of the UK tax system.

Indeed, the more the case of Section 58 is examined, the more worrying the trend towards using retrospective legislation to punish scapegoats, be they “bankers”, “the rich”, or “tax dodgers”, appears. HMRC failed to carry out its standard impact assessment into the changes. Established protocol for implementing retrospective legislation was ignored. A Judicial Review and Court of Appeal hearing into whether the legislation complied with human rights law has since revealed serious discrepancies in the information presented to Parliament, including an omission of HMRC’s previous acknowledgement that the targeted schemes were legal and could not be challenged in the courts.

George Osborne has said that he considers tax avoidance to be morally repugnant. But true moral repugnance is amending legislation and applying the changes retrospectively to force taxpayers into bankruptcy simply for following the law as it stood at the time. Retrospective legislation damages the investment climate in the country and acts as a disincentive to entrepreneurship and success. It also represents an Orwellian expansion of state power at the expense of individual liberty and protection under the law. The Treasury Select Committee has reiterated that retrospection must only be used in wholly exceptional circumstances which must be clearly defined. For these reasons, the Chancellor should avoid the temptation to act retrospectively and, in the case of Section 58, must also correct previous injustices that have been created through arbitrary and selective changes to the tax system.

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