R (Huitson) v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Sullivan,Lord Justice Tomlinson |
| Judgment Date | 25 July 2011 |
| Neutral Citation | [2011] EWCA Civ 893 |
| Docket Number | Case No: C1/10/0360 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 July 2011 |
[2011] EWCA Civ 893
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
THE HON MR JUSTICE KENNETH PARKER
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Sullivan
and
Lord Justice Tomlinson
Case No: C1/10/0360
CO/10012/2008
MR DAVID ELVIN QC and MR JAMES RAMSDEN (instructed by Devonshires) for the Appellant
MR RABINDER SINGH QC and MR CLIVE SHELDON (instructed by the Solicitor for HMRC) for the Respondents
Hearing dates: 2 nd, 3 rd, 4 th November 2010
Approved Judgment
Introduction
This is a very unusual income tax case. The claimant taxpayer initiated it against Her Majesty's Revenue and Customs ("HMRC"). By way of judicial review the claimant challenges the lawfulness of HMRC's enforcement of retrospective amendments to legislation in violation of his human rights. The claimant says that, before the legislation was amended with retrospective effect, he was entitled to relief from UK income tax on income received by him from a trust in the Isle of Man. Now HMRC rely on the amendments to deny him, retrospectively, the tax relief previously available.
The arguments range widely over public interest issues: the right to enjoy one's possessions without unjustified State interference; a taxpayer's legitimate expectations in such matters; the State's fiscal policies and financial concerns; principles of legal certainty and proportionality in the context of retrospective legislation; achieving a fair balance between the interests of the community and the rights of the individual; the operation of Double Taxation Arrangements; and changes over recent years in the judicial approach to the construction of tax avoidance schemes and applicable tax legislation.
The prominent features in the litigation landscape are: (a) a marketed tax avoidance scheme locating a trading partnership and an interest in possession trust in the Isle of Man in order to take advantage of a Double Taxation Agreement ("DTA") made between the United Kingdom and the Isle of Man in 1955 (as subsequently amended), the scheme having no other purpose than the avoidance of UK income tax; (b) legislation in s.58 (3), (4) and (5) of the Finance Act 2008 ("the 2008 Act") amending retrospectively the long standing double taxation relief provisions, the aim being to render the tax avoidance scheme ineffectual by depriving it of its potential tax advantages for a taxpayer resident in the United Kingdom and in receipt of income here from his Manx trust; and (c) the taxpayer's claim for judicial review of the unlawful application to him of the amended legislation on the ground that its retrospective effect is incompatible with his fundamental right to the peaceful enjoyment of "possessions" as guaranteed, through the Human Rights Act 1998, by Article 1 to the First Protocol to the European Convention on Human Rights ("the Convention").
It is common ground that Article 1 of the First Protocol lays down the principle of peaceful enjoyment of property. It covers the deprivation of property, while recognising that the State is entitled to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. The Convention requires that a measure which interferes with peaceful enjoyment of property should be proportionate to the object for which it is imposed.
The term "possessions" in Article 1 of the First Protocol bears an autonomous meaning: it includes rights in property and rights to property. There is protection for familiar property interests in physical things of significant economic value. There is also protection for rights in judgments, awards and recognised property claims under domestic law, such as a claim to payment of state compensation or a claim to repayment of VAT paid under a mistake.
The particular "possession" for which protection is sought here is a claim for tax relief: not having to pay UK income tax on the profits of an Isle of Man partnership trade paid to the UK taxpayer through and under a Manx trust. HMRC dispute the similarity of such a claim to a claim for compensation. They say that in this case the claimant is not being deprived of an asset or proprietary kind of claim. Rather the claimant is asserting that he should not have to pay the same level of income tax as other taxpayers who, like him, live in the UK and carry on the trade or profession of providing services to clients in the UK. The position of Mr Robert Huitson, the taxpayer claimant, is that the value of the tax relief to him is in the region of £195,000. That, he says, is a right to property of significant value. He says that he has been deprived retrospectively of a proprietary interest in a claim to tax relief in each relevant year of past assessment.
Mr Huitson is the appellant in this court. I will refer to him throughout this judgment as the claimant.
Kenneth Parker J made an order dated 28 January 2010 in accordance with his judgment [2010] EWHC 97 (Admin); [2011] 1 QB 174. He dismissed the claim in judicial review proceedings commenced by the claimant on 21 October 2008. The relief sought was a declaration that the retrospective element of s.58 of the 2008 Act and the claimant's liability to pay additional tax infringed and was incompatible with Article 1 of the First Protocol to the Convention. The judge held that:—
"96.….the challenged legislation, although having retrospective effect, is in the relevant circumstances proportionate and compatible with article 1 of the First Protocol to the Convention."
The judge refused permission to appeal.
By an order dated 26 May 2009 in the case of R (Shiner & Anor) v. HMRC C1/2009/08) an application for judicial review seeking declarations that the retrospective effect of s.58 was incompatible with Article 56 of the EC Treaty, as well as with Article 1 of the First Protocol, was directed to be listed with this appeal before the same constitution. The hearing of the judicial review application in Shiner immediately preceded the hearing of this appeal. The separate judgments handed down on this appeal and on the judicial review application should be read together for the full picture of the proceedings between taxpayers and HMRC about the lawfulness of HMRC enforcing the retrospective provisions in the 2008 Act.
Background facts
The claimant is an electrical engineer who is resident in the United Kingdom where he works as a self-employed IT consultant. The end users of his services are based in the UK. The claimant would ordinarily pay UK income tax on the taxable profits of his trade. Following the "IR35" legislation in 2000 he could not have obtained any tax advantage by supplying his services to end users through an intermediary, such as a company.
From June 2001, when he became a client of Montpelier Tax Planning (Isle of Man) Limited of Douglas, Isle of Man, the claimant participated in a tax avoidance scheme operated through a partnership and a trust located in the Isle of Man. It was designed to take advantage of the DTA provisions for claiming relief from UK income tax on specified income paid to a UK resident. Under the scheme the claimant provided his services to end users in the UK through an intermediary partnership. It is called the Allenby Partnership. It consists of five companies incorporated and resident in the Isle of Man. Each partner is the trustee of an interest in possession trust established in the Isle of Man. The claimant was the settlor and is the life tenant under one such trust called the Robert Huitson Family Settlement. He paid £1,000 into that trust. The trustee was Crackington Limited. Along with the other ordinary partners Crackington entered into partnership with a managing partner.
The claimant entered into a consultancy agreement with the Allenby Partnership, which arranged for him to provide his IT consultancy services to end users in the UK. The Allenby Partnership received full payment for his services. Under the consultancy agreement the claimant received a fixed annual fee of £15,000, or such lesser sum as might be generated by his work for the partnership. The annual fee was subject to UK tax.
The tax avoidance aspect of the scheme arrangements focused on fee income that was channelled to the claimant through his Manx interest in possession trust. That income, which could well exceed £15,000 a year, was generated by the claimant's activities through the medium of the Allenby Partnership. The partnership paid profits to the trustee, which then made payments to the claimant in the UK in his capacity as the beneficial owner of an interest in possession under the trust.
The claimant's case was that, as a result of the DTA provisions and the legislation then in force, the income channelled to him through his Manx trust was not subject to UK income tax nor, it seems, not even subject to Manx tax as a result of concessions made by the fiscal authorities in the Isle of Man. He claimed that the income he received from "the offshore trust, in my capacity as the sole income beneficiary, represents the share of the profit of an Isle of Man Partnership whose profits are excluded from UK tax by virtue of Article 3 of the UK-Isle of Man Double Taxation Agreement. My claim for Double Tax Relief, as the life tenant, is based on Baker v Archer Shee principles. "(That case is authority for the proposition that a beneficiary under an interest in possession trust has an absolute right to the income and that the income does not belong to the trustee.)
As for his tax treatment by HMRC, the claimant's position was that from 2002 onwards he submitted tax...
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