Appeal court upholds retrospective effect of BN66
HM Revenue & Customs is one step closer to collecting £100m in backdated income tax from thousands of IT contractors, after the Court of Appeal ruled that such retrospective taxation does not violate their human rights.
Despite having had almost nine months to deliberate, appeal court judge Lord Justice Mummery took little time in summarily dismissing the four grounds of appeal, lodged in November last year by Robert Huitson.
Like thousands of other IT consultants who used a tax mitigation scheme, the IT contractor was hoping to hear that the High Court was wrong in January to find that HMRC’s backdating of Section 58 of the Finance Act was lawful.
On the grounds of human rights, Huitson’s legal team has said the retrospective effect of the law, and the ensuing tax demands for clients of scheme provider Montpelier, caused “financial worry, mental health problems and marital breakdown.”
Sounding potentially sympathetic, or just mindful of a separate challenge to S58 by PricewaterhouseCoopers, Lord Justice Mummery acknowledged that there was a “range” of arguments as to why the retrospection in the Finance Act should be overturned.
But for IT contractors, the judge’s receptivity went no further.
Turning to the four grounds of appeal – proportionality; tax efficacy of the scheme/its users’ expectations, HMRC’s conduct and delay (HMRC knew of the scheme for seven years before acting) and HMRC’s failure to assess the impact on taxpayers, the judge cited multiple counter arguments to dismiss them all.
The judgement attempts to sum up the different arguments put by Huitson’s lawyer, Robert Elvin QC: “All of the submissions go to an over-arching general thesis that the retrospective provisions of the 2008 Act failed to achieve a fair balance between the interests of the general body of taxpayers and the rights of the claimant as an individual and that they are disproportionate and incompatible with Article 1 [of the Convention on Human Rights].”
But Lord Justice Mummery responded: “I would dismiss this appeal. The [High Court] judge was not wrong to conclude in his comprehensive, clear and excellent judgment that the retrospective provisions of the 2008 Act are proportionate and are compatible with Article 1. There are no grounds which would entitle this court to disturb it.”
Lord Mummery then set out what he called “the crucial points” that determined his decision. Firstly, “that 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.”
Secondly, that “the legislation achieves a fair balance between the interests of the general body of taxpayers and the right of the claimant to enjoyment of his possessions, without imposing an unreasonable economic burden on him.”
And thirdly that “this outcome accords with the reasonable expectations of the taxation of residents in the State on the profits of their trade or profession. The legislation prevents the DTA tax relief provisions from being misused for a purpose different from their originally intended use.”
Addressing Huitson, the judge concluded: “There has been no conduct on the part of the State fiscal authorities that has made the retrospective application of the amended legislation to his tax affairs an infringement of his Convention rights.”
More positively for him, and for other users of the Montpelier scheme, the judgement confirms that HMRC will not enforce collection of the tax demands under S58 until the case, and the PwC case, is settled.
The confirmation alludes to the expectation that both cases are destined for the Supreme Court, assuming the taxpayers have the appetite to fight on and do not wish to accept defeat at the hands of HMRC.
Last night, the scheme provider sounded determined: “Montpelier is disappointed with the Huitson Judgment and subject to discussion with the client and counsel an application to appeal will be lodged, primarily on the grounds that the case raises serious issues of public importance.”
In a statement, the firm added that it found the ruling “equally [as] difficult” to understand as the judgement in the PwC appeal which, although fought on different grounds, was similarly dismissed by the CoA, thereby also upholding the retrospective effect of S58 (also known as BN66) as lawful.