HUITSON v. THE UNITED KINGDOM

FOURTH SECTION

DECISION

Application no. 50131/12
Robert HUITSON
against the United Kingdom

The European Court of Human Rights (Fourth Section), sitting on 13 January 2015 as a Chamber composed of:

Guido Raimondi, President,
Päivi Hirvelä,
Ledi Bianku,
Nona Tsotsoria,
Paul Mahoney,
Krzysztof Wojtyczek,
Faris Vehabović, judges,

and Fatoş Aracı, Deputy Section Registrar,

Having regard to the above application lodged on 6 August 2012,

Having deliberated, decides as follows:

THE FACTS

The applicant, Mr Robert Huitson, is a British national, who was born in 1958 and lives in Stockport. He was represented before the Court by Devonshires Solicitors, lawyers practising in London.

A. The circumstances of the case

The facts of the case, as submitted by the applicant, may be summarised as follows.

1. The background of the Tax Avoidance Scheme

1. The applicant is a qualified electrical engineer and worked as a self-employed Information Technology (“IT”) consultant. The end users of his services were based in the United Kingdom. He would ordinarily account for income tax on the taxable profits of his trade or profession in the United Kingdom.

2. On 20 June 2001 the applicant became a client of Montpelier Tax Consultants (Isle of Man) Limited (“Montpelier”). Montpelier provided advice to the applicant with respect to a marketed tax avoidance scheme (“the scheme”) centred on the Isle of Man seeking advantage of the United Kingdom-Isle of Man Double Taxation Arrangement 1995 (“the DTA”).

3. As a result of the scheme, the applicant no longer supplied his IT consultancy services directly to his end-user clients based in the United Kingdom. Instead, an intermediary, the Allenby Partnership (“the Partnership”), which was constituted by five companies incorporated and resident in the Isle of Man, contracted, directly or indirectly with the end-users to provide the applicant’s services. The intermediary received full payment for such services and the applicant received an annual fee of GBP 15,000 (or less) from the intermediary. The rest of his reward for his services was received only in his capacity as the owner of a life interest in a Trust established in the Isle of Man and of which one of the Partnership companies was the trustee.

4. Until the relevant legislation was amended with retrospective effect, the applicant contended that, as a result of the DTA and the legislation then applicable, the income channelled through the trust was not subject to United Kingdom income tax. Nor, apparently, was it subject to Manx tax, since the beneficiary (the applicant), unlike the trustee, was not resident in the Isle of Man. The effect of the use of the DTA meant that the applicant was able to reduce his effective income tax rate to an average of 3.5%.

5. In his tax return for the period 2001/2002, the applicant claimed relief from income tax in the sum of GBP 20,350.90 representing trust income. Relying on domestic jurisprudence, the applicant’s case was that the profits received by the trustee as a partner were not treated as belonging to the trustee but to the beneficiary with an interest in possession under the trust, with the consequence that the income arising from his beneficial interest in possession under the trust could not be assessed to United Kingdom tax.

6. Her Majesty’s Revenue and Customs (“HMRC”) first wrote to the applicant regarding his use of the tax avoidance scheme on 4 December 2003. In that letter he was informed that HMRC was likely to challenge the validity of the claim. No basis for the challenge was mentioned. The applicant was advised to make payment on account in respect of the disputed sum, so as to avoid the accrual of interest and the incurrence of a possible penalty. It appears that he chose not to do so.

7. Similar correspondence followed in respect of tax years 2002/2003, for which the applicant claimed relief of GBP 27,350; 2003/2004, for which he claimed relief of GBP 32,405.71, and 2005, for which he claimed relief of GBP 38,250.

8. On 14 February 2006, HMRC set out reasons for the challenges to the claims of relief, and on 16 May 2007 it informed the applicant that it was preparing a number of lead cases to take to the Special Commissioners regarding the validity of the claims to the DTA.

9. However, before the cases were listed, the United Kingdom Government announced, in its Budget of 12 March 2008, proposals to introduce what became section 58 of the Finance Act 2008 (“the 2008 Act”), which came into force on 21 July 2008. Section 58 of the Finance Act of 2008 amended with retrospective effect the existing legislation in section 858 of the Income Tax (Trading and Other Income) Act 2005. Any assessment to income tax (in the absence of fraud or negligence) was limited to six years, so that the retrospective effect of section 58 extended no further back than to the tax year 2001/2002. The effect of this change of legislation was to render the scheme ineffectual and to impose on the applicant and others in a similar position liability to pay United Kingdom income tax on trust income received in past years.

10. HMRC revised the applicant’s tax assessments accordingly. The revisions and the validity of the legal basis on which they were made were challenged by the applicant by way of legal proceedings.

2. The legal proceedings instituted by the applicant

11. The applicant brought judicial review proceedings in the High Court against HMRC on 21 October 2008. At this stage his outstanding tax liability was more than GBP 100,000. He sought to challenge sections 58(4) and (5) of the 2008 Act under the Human Rights Act 1998. His ground of challenge was that these sections of the 2008 Act changed fiscal legislation regarding double taxation relief with retrospective effect and that such retrospective amendment did not strike a fair balance as required by Article 1 of Protocol No. 1 of the European Convention on Human Rights and the jurisprudence of the European Court of Human Rights.

12. On 28 January 2010 Mr Justice Kenneth Parker dismissed the claim, finding that the challenged legislation, although having retrospective effect was, in the relevant circumstances, proportionate and compatible with Article 1 of Protocol No. 1.

13. The applicant appealed to the Court of Appeal, which heard the matter over three days in November 2010, and judgment was delivered on 25 July 2011. Lord Justice Mummery giving the lead judgment dismissed the appeal, finding that the High Court judge had not been wrong to conclude that the retrospective provisions of the 2008 Act were proportionate and compatible with Article 1 of Protocol No. 1. Mummery LJ noted that the applicant had taken advantage of a marketed tax avoidance scheme for no other purpose than the avoidance of United Kingdom income tax. According to him, 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. The legislation achieved a fair balance between the interests of the general body of taxpayers and the right of the applicant to the enjoyment of his possessions, without imposing an unreasonable economic burden on him. Moreover, the legislation prevented the DTA tax relief provisions from being misused for a purpose different from their originally intended use. On the issue of prior test litigation, Mummery LJ upheld Parker J’s finding that there was no legal obligation on the State to test the matter of the efficacy of the scheme in the courts before enacting legislation. Moreover, taxpayers were not powerless to bring the issue to a head themselves (under provisions in s.28A of the Taxes Management Act 1970) without waiting for HMRC to bring proceedings in respect of the arrangements. They did not pursue such a course. Concerning a possible pre-legislation assessment of the impact of retrospectivity on the taxpayers concerned, Mummery LJ found in the circumstances such an assessment would not have yielded any relevant information which HMRC did not already know.

14. At this stage, the figure of the tax relief the applicant was ultimately deprived of was in the region of GBP 195,000. According to Mummery LJ, this liability was no more an unjustified interference with his enjoyment of his possessions than the ordinary liability that his fellow residents in the United Kingdom were under a duty to contribute, by way of United Kingdom tax on their income, towards the costs of providing community and other benefits for the purposes of life in a civil society.

15. On 7 February 2012 the Supreme Court of the United Kingdom denied permission to appeal.

B. Relevant domestic law and practice

16. United Kingdom-Isle of Man Double Taxation Arrangement 1995 (“the DTA”):

“3 (2) The industrial or commercial profits of a Manx enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as is attributable to that permanent establishment.”

17. Section 858 of the Income Tax (Trading and Other Income) Act 2005 provided as follows:

“858 Resident partners and double taxation agreements.

(1)This section applies if—

(a) a UK resident (“the partner”) is a member of a firm which—

(i) resides outside the United Kingdom, or

(ii) carries on a trade the control and management of which is outside the United Kingdom, and

(b) by virtue of any arrangements having effect under section 788 of ICTA (“the arrangements”) any of the income of the firm is relieved from income tax in the United Kingdom.

(2) The partner is liable to income tax on the partner’s share of the income of the firm despite the arrangements.

(3) If the partner’s share of the income of the firm consists of or includes a share in a qualifying distribution—

(a) made by a UK resident company, and

(b) chargeable to tax under Chapter 3 of Part 4,

the partner (and not the firm) is, despite the arrangements, entitled to the share of the tax credit which corresponds to the partner’s share of the distribution.”

18. Section 58 of the Finance Act 2008 provides as follows:

“UK residents and foreign partnerships.

(1) In section 115 of ICTA (partnerships involving companies: supplementary), after subsection (5B) insert—

“(5C) For the purposes of subsections (5) to (5B) the members of a partnership include any company which is entitled to a share of income or capital gains of the partnership.”

(2) In section 59 of TCGA 1992 (partnerships), insert at the end—

“(4) For the purposes of subsections (2) and (3) the members of a partnership include any person entitled to a share of capital gains of the partnership.”

(3) In section 858 of ITTOIA 2005 (resident partners and double taxation agreements), insert at the end—

“(4) For the purposes of this section the members of a firm include any person entitled to a share of income of the firm.”

(4) The amendments made by subsections (1) to (3) are treated as always having had effect.

(5) For the purposes of the predecessor provisions, the members of a partnership are to be treated as having included, at all times to which those provisions applied, a person entitled to a share of income or capital gains of the partnership.

(6)“The predecessor provisions” means—

(a) section 153(4) and (5) of the Income and Corporation Taxes Act 1970 (c. 10) (as it had effect under section 62(2) of F(No.2)A 1987), and

(b) sections 112(4) to (6) and 115(5) of ICTA.”

19. On the same day as the Court of Appeal gave judgment in the applicant’s case, the same three judges gave judgment in the case of R (Shiner & Anor) v. HMRC C1/2009/08. The claim in that case was for a declaration that the amendments in section 58 of the Finance Act 2008 were incompatible with Article 56 of the TFEU (Treaty on the Functioning of the European Union), as well as Article 1 of Protocol No. 1 of the European Convention on Human Rights. The claimants in that case argued that the amendments made by section 58 were capable of preventing, restricting or discouraging commercial investment of capital in foreign partnerships by means of unjustified discrimination between an investment of capital in a foreign partnership and an investment of capital in a United Kingdom partnership. They argued that its retrospectivity was an infringement of the European Union principles of legal certainty and legitimate expectation. The complaint was dismissed.

COMPLAINT

20. The applicant complained under Article 1 of Protocol No. 1 to the Convention that sections 58(4) and (5) of the Finance Act 2008, which were given retrospective effect, were incompatible with that Article and did not strike a fair balance and were disproportionate. He complained that legislating in this way deprived him of his proprietary interest and failed to give effect to a legitimate expectation that he would be entitled to benefit from the fruits of the scheme. He complained of the seven-year delay of the HMRC before taking action and not litigating the efficacy of the scheme in the courts before Parliament enacted legislation. He complained that no impact assessment was made before the enactment of section 58(4) of the 2008 Act which made the retrospective application disproportionate. Finally, he complained that the HMRC had acted inconsistently by accepting the legitimacy of the scheme in the case of some taxpayers while denying its legitimacy in the case of others.

THE LAW

I. COMPLAINT UNDER ARTICLE 1 OF PROTOCOL NO. 1 TO THE CONVENTION

21. The applicant complained of the retrospective application of section 58(4) of the 2008 Act (see paragraph 18 above). He submitted that that provision had infringed his right to the peaceful enjoyment of his possessions and breached Article 1 of Protocol No. 1 to the Convention, which provides:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

A. Compliance with Article 1 of Protocol No. 1

1. Whether there were possessions within the meaning of Article 1 of Protocol No. 1

22. The Court reiterates that, according to its case-law, an applicant can allege a violation of Article 1 of Protocol No. 1 to the Convention only in so far as the impugned decisions relate to his “possessions” within the meaning of that provision. “Possessions” can be “existing possessions” or assets, including, in certain well-defined situations, claims. For a claim to be capable of being considered an “asset” falling within the scope of Article 1 of Protocol No. 1 the claimant must establish that it has a sufficient basis in national law, for example, where there is settled case-law of the domestic courts confirming it. Where that has been done, the concept of “legitimate expectation” can come into play (Draon v. France [GC], no. 1513/03, § 65, 6 October 2005). An applicant must be at least able to argue that he has a legitimate expectation of obtaining effective enjoyment of a property right.

23. The first question which therefore arises in this case is whether the applicant’s claim for income tax relief, relying on section 3(2) of the DTA, constituted an “asset” attracting the guarantees of Article 1 of Protocol No. 1 (for a recapitulation of the general principles on the applicability of Article 1 of Protocol No. 1 see, among other references, Iatridis v. Greece [GC], no. 31107/96, § 54, ECHR 1999-II; Beyeler v. Italy [GC], no. 33202/96, § 100, ECHR 2000-I; Prince Hans-Adam II of Liechtenstein v. Germany [GC], no. 42527/98, § 83, ECHR 2001-VIII; or Kopecký v. Slovakia [GC], no. 44912/98, §§ 35 and 48 to 52, ECHR 2004‑IX). However, the Court does not consider it necessary to determine that issue as it finds that the applicant’s complaint is in any event inadmissible for the reasons set out below (see Lawyer Partners a.s. v Slovakia, No. 51550/07, § 78, 8 October 2013).

2. Whether there was an interference

24. The enactment of section 58 of the 2008 Act, with retrospective effect, rendered the tax avoidance scheme relied on by the applicant ineffectual and imposed on him, and others in a similar position, liability to pay United Kingdom income tax on trust income received in past years. The Court proceeds on the assumption that the retroactive amendments to legislation operated in a way which constituted an interference with the enjoyment of the applicant’s possessions. It will therefore assess whether or not that interference was justified.

3. Whether the interference was justified

(a) The applicable rule

25. Article 1 of Protocol No. 1 in substance guarantees the right of property (see Marckx v. Belgium, 13 June 1979, § 63, Series A no. 31). Article 1 of Protocol No. 1 comprises three distinct rules: “the first rule, set out in the first sentence of the first paragraph, is of a general nature and enunciates the principle of the peaceful enjoyment of property; the second rule, contained in the second sentence of the first paragraph, covers deprivation of possessions and subjects it to certain conditions; the third rule, stated in the second paragraph, recognises that the Contracting States are entitled, amongst other things, to control the use of property in accordance with the general interest. The three rules are not, however, “distinct” in the sense of being unconnected. The second and third rules are concerned with particular instances of interference with the right to peaceful enjoyment of property and should therefore be construed in the light of the general principle enunciated in the first rule” (see, among other authorities, Sporrong and Lönnroth v. Sweden, 23 September 1982, § 61, Series A no. 52; James and Others v. the United Kingdom, 21 February 1986, § 37, Series A no. 98; Iatridis v. Greece [GC], cited above; and Beyeler v. Italy [GC], no. 33202/96, § 98, ECHR 2000-I).

26. It would appear to the Court to be the most natural approach to examine the applicant’s complaint from the angle of a control of the use of property in the general interest “to secure the payment of tax”, which falls within the rule in the second paragraph of Article 1 (National & Provincial Building Society, and Leeds Permanent Building Society and Yorkshire Building Society v. the United Kingdom, 23 October 1997, § 79).

(b) Compliance with the conditions laid down in the second paragraph

27. According to the Court’s well-established case-law (see, among many other authorities, Gasus Dosier- und Fördertechnik GmbH v. the Netherlands, 23 February 1995, § 62, Series A no. 306‑B and National & Provincial Building Society, and Leeds Permanent Building Society and Yorkshire Building Society v. the United Kingdom, 23 October 1997, § 80, Reports of Judgments and Decisions 1997‑VII), an interference, including one resulting from a measure to secure the payment of taxes, must strike a “fair balance” between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must therefore be a reasonable relationship of proportionality between the means employed and the aims pursued. Finally, the applicant must not bear an individual and excessive burden (Sporrong and Lönnroth v. Sweden, 23 September 1982, § 73, Series A no. 52).

28. Furthermore, in determining whether this requirement has been met, it is recognised that a Contracting State, not least when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the Court will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation (see Althoff and Others v. Germany, no. 5631/05, § 60, 8 December 2011). Nor does the fact that the legislation applied retroactively in the applicant’s case constitute per se a violation of Article 1 of Protocol No. 1, as retrospective tax legislation is not as such prohibited by that provision (M.A. and others v. Finland, no. 27793/95, 10 June 2003; and Di Belmonte v. Italy, no. 72665/01, 3 June 2004).

29. The Court recalls that the applicant entered into what the domestic courts described as a marketed and wholly artificial tax avoidance scheme with the effect that the general rule that United Kingdom taxpayers should pay United Kingdom income tax on the profits of their trade or profession was contravened (see paragraph 13 above). By the time the challenged legislation, with its retrospective amendments, was enacted there were about 2,500 taxpayers exploiting similar arrangements, and the amount of income tax at stake for the respondent Government had risen to GBP 100 million. As a result of the scheme, the applicant claimed that he was able to reduce his effective income tax rate to 3.5%, thereby ensuring a considerable competitive advantage in comparison to other IT consultants. Although advised to make payment on account in respect of the disputed sums, so as to avoid the accrual of interest and the incurrence of a possible penalty, it appears that the applicant chose not to do so (see paragraph 6 above).

30. The Court notes that in the present case the object of the legislative amendments in issue was to prevent the DTA tax relief provisions from being misused for a purpose different from their originally intended use, that is relieving tax payers from double taxation. The Court considers that it is a legitimate and important aim of public policy in fiscal affairs that a DTA should do no more than relieve double taxation and should not be permitted to become an instrument by which persons residing in the United Kingdom avoid, or substantially reduce, the income tax that they would ordinarily pay on their income. Moreover, it is in the general interest of the community to prevent taxpayers resident in the United Kingdom from exploiting the DTA in a way which would enable them to substantially reduce their income tax and secure a competitive advantage over those who chose not to use such a scheme.

31. As to the reasonable relationship of proportionality between the means employed and the aims pursued, the Court considers that it was within the area of discretionary judgment for Parliament to legislate with retrospective effect to ensure a fair balance between the general body of resident taxpayers and the individuals who sought to benefit from the scheme, in particular taking into account the number of taxpayers relying on the scheme and the potential financial loss at stake for the Respondent Government.

32. The Court accepts the domestic courts’ finding that there was no legal requirement on the respondent Government to carry out either a formal or informal impact assessment before enacting retrospective legislation, nor was there any legal obligation to bring legal proceedings in respect of the scheme before enacting retrospective legislation. Given the highly artificial nature of the tax avoidance scheme, the Court is persuaded that the absence of such an assessment, as well as test litigation, does not affect the proportionality of the impugned measure.

33. In so far as the applicant seeks to argue that the allegedly long delay of seven years before retrospective legislation was enacted also affects the proportionality of the measure, the Court rejects any such contention. At no stage did HRMC indicate that the applicant could safely rely upon the tax arrangements. On the contrary, they maintained, through correspondence over a number of years, that the arrangements did not work and advised him to pay on account the income tax that was properly due (see paragraphs 6 and 7). The applicant chose not to pay the disputed sums on account, nor to test the efficacy of the scheme himself before court. Accordingly, he did not have to bear an individual or excessive burden.

34. The Court accepts the domestic court’s finding that there was no settled case-law on the efficacy of the arrangements to avoid tax and that the applicant could reasonably have expected that Parliament would respond in a way which ensured fairness generally between all taxpayers in the United Kingdom. Accordingly the Court is not persuaded that the applicant had a legitimate expectation either that the scheme would work or that the law would not be changed retrospectively to take away his existing claim for tax relief.

35. Taking into account the wide margin of appreciation which the States have in taxation matters, the Court considers therefore that the actions taken by the respondent State, in legislating retrospectively through section 58 of 2008 Act, did not upset the balance which must be struck between the protection of the applicant’s rights and the public interest in securing the payment of taxes.

36. It follows that this complaint is manifestly ill-founded and must be rejected in accordance with Article 35 §§ 3 and 4 of the Convention.

For these reasons, the Court unanimously

Declares the application inadmissible.

Done in English and notified in writing on 5 February 2015.

Fatoş AracıGuido Raimondi
              Deputy RegistrarPresident

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