UK May Have Breached Taxpayers' Human Rights

by Robert Lee, Tax-News.com, London

23 July 2009

The UK government may have breached certain taxpayers’ human rights with its decision to retrospectively apply an amendment to last year’s Finance Act which was intended to counter a tax avoidance scheme.

The issue was raised in a report by the Human Rights Joint Committee of the UK Parliament, which noted representations arguing that the changes made by section 58 of the 2008 Act are in breach of Article 1 of the European Convention on Human Rights (ECHR) because “they are retrospective in effect and no adequate justification for such retrospectivity has been provided.”

The change is intended to counter a tax-avoidance scheme purporting to exempt from UK tax income received by UK resident individuals by using certain provisions in the UK's bilateral double taxation treaties. This was intended to tighten ambiguities in legislation introduced in the Finance (No.2) Act 1987, which the scheme is supposed to exploit.

According to the government, the 2008 provision attempts to put beyond doubt that the effect of the legislation has always been that where UK residents are members of foreign partnerships, nothing in any double taxation treaty affects their tax liability, and that the UK individuals "remain liable to UK tax despite the elaborate, artificial structure designed to exempt them."

However, according to the joint committee’s report, it would appear to be the case that such schemes have been in existence for a number of years, with HMRC's knowledge, but HMRC had not sought to close them down until the 2008 Finance Bill.

The committee has received evidence that, as a result of this provision, more than 2,000 people are now facing tax demands going back up to 7 years, along with punitive interest charged for late payment. Most of these people are freelance workers, such as IT contractors, project managers, and oil and gas engineers. “The impact on many of these individuals and their families appears to be severe,” the report states.

According to a survey of those affected, conducted between June 1 and 5, 2009, 57 said they could not meet the tax demand, even if they sold all of their assets including their family home, and a further 29 could only settle by selling or remortgaging their family home.

“A number of people face personal bankruptcy,” the report notes. “The related financial worry is causing mental health problems and marital breakdown.”

This evidence, the report stated, suggests that the government failed to carry out the necessary assessment of the impact that such a retrospective taxation measure would have on the individuals affected.

In a Written Answer dated May 20, 2009, the Financial Secretary to the Treasury, Stephen Timms, states "formal impact assessments are not published in respect of measures where the impact is only on those who are avoiding tax and thus one was not published for this particular measure." He estimated that the tax at stake on these schemes was around GBP200m.

However, the report counters that, “in the absence of a satisfactory justification for retrospection, there is therefore at least an arguable breach of Article 1 Protocol 1” of the ECHR.

The committee has written again to Timms requesting a “detailed assessment” of the impact of the measure on those affected, and the government's “detailed justification” for the retrospective effect of section 58.

The committee has recommended that in future, the government provide the committee with a memorandum describing in detail the impact of, and justification for, any retrospective measures in future finance bills.

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