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Parliament Entitled to Close Perceived Tax Loophole Retrospectively

There is nothing inherently wrong with Parliament legislating retrospectively in order to plug perceived tax loopholes. The High Court resoundingly made that point in rejecting claims that a back-dated change in the law violated the human rights of thousands of taxpayers to whom it came as a financial bombshell.

The Finance (No 2) Act 2017 was passed in response to HM Revenue and Customs' (HMRC's) concerns about a multiplicity of so-called 'disguised remuneration' schemes. Such schemes came in various forms and with differing levels of complexity but, in simple terms, they commonly involved companies making loans to their employees on which no Income Tax or National Insurance Contributions were paid.

Sponsors of such schemes argued that the loans could not be viewed as taxable income. However, they were generally provided on highly preferential terms and employees were usually excused from repaying them indefinitely. HMRC took the view that, as a matter of economic reality, the loans were part of the reward given to employees in return for the work or services they provided.

The effect of the Act was to roll up relevant loans or quasi-loans that had been made since 6 April 1999 and to tax them as employment income received in the 2018/19 tax year. Similar provision was made in respect of self-employed contractors who had received loans in lieu of pay. About 50,000 workers were caught by the legislation and faced imminent receipt of substantial tax demands.

Two affected workers launched a judicial review challenge to the legislation, arguing that it breached their human right to peacefully enjoy their possessions, enshrined in Article 1 of the First Protocol to the European Convention on Human Rights. They asserted that the loans they received were genuine, that they were obliged to repay them and that they had engaged in tax mitigation, rather than avoidance.

Ruling on the case, the Court noted that HMRC had long disputed the effectiveness of disguised remuneration schemes. All that workers had been deprived of by the Act was an argument that they were not liable to pay tax on the loans. They had not been deprived of anything that could be described as a 'possession' and their rights under Article 1 were therefore not engaged.

In dismissing the claims, the Court noted that each of the workers was party to an arrangement to receive money as remuneration for their services by a means that they knew was designed and intended to prevent them having to pay tax that would normally be chargeable on the same sum if it had been paid as part of their salary.

The fact that the Act had retrospective effect did not, of itself, render it incompatible with Article 1. Parliament had struck a fair balance between public and private interests and the evidence fell far short of establishing that the Act was a disproportionate response. HMRC were alive to the impact of the change in the law on individuals and steps had been taken to support affected taxpayers and to reduce the risk of them becoming insolvent.

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