In the recent case of Ignatius Fessal V HMRC  UKFTT 0285 (TC) the First-tier Tribunal (FTT) held that a double charge to income tax on the same profits infringed the taxpayer's human rights under Article 1 First Protocol to the European Convention on Human Rights (A1P1) (peaceful enjoyment of possessions), as applied by section 3 Human Rights Act 1998 (HRA).
The facts, so far as relevant, can be stated briefly. The taxpayer filed his income tax self-assessment returns for 2005/06 to 2008/09. He was in the 'transitional regime' applicable to barristers moving from the cash to the 'true and fair' basis of recognising profits for tax purposes, under section 42, FA 1998. His returns did not correctly reflect the allocation of profits between those years under the transitional regime. HMRC opened an enquiry into the taxpayer's self-assessment for 2008/09 and revised returns were submitted for 2005/06 to 2008/09. The taxpayer had underpaid tax for 2005/06 and 2007/08, but had overpaid tax by a corresponding amount for 2006/07 and 2008/09.
HMRC informed the taxpayer in December 2011 that any claim for overpayment relief for 2006/07 was out of time and in March 2012 issued discovery assessments under section 29, TMA 1970, in respect of 2005/06 and 2007/08. The taxpayer appealed. He argued that the assessments for 2005/06 and 2007/08 should be reduced by reference to the tax which he had paid in respect of 2006/07, notwithstanding that his claim for repayment of that tax was excluded by the statutory time limit. The taxpayer claimed, amongst other things, that it was disproportionate for HMRC to collect tax on the profits of a period when it had already collected tax on those profits in a tax year that was 'closed' as this would lead to double taxation in contravention of his human rights under A1P1.
In allowing the taxpayer's appeal, the FTT adopted a similar approach to the Supreme Court in R v Waya  UK SC 51, and concluded that the power of the relevant HMRC officer to issue an assessment under section 29 should be read as being to make an assessment of the amount of tax which is the amount required in his opinion to make good the loss of tax, but only where assessing that amount does not breach the taxpayer's rights under A1P1. A double charge to income tax on the same profits would infringe the taxpayer's human rights under A1P1 and accordingly the overpaid tax for the closed year had to be taken into account which would reduce the quantum of the assessment.
The FTT confirmed that in considering whether the assessments were validly issued under section 29, it was necessary to construe section 29 in a manner that was compatible with A1P1. Accordingly, pursuant to section 3 HRA, section 29 was to be construed as enabling HMRC to issue an assessment which makes good the loss of tax but only after taking into account in the assessment a related overpayment which arises as a result of the circumstances giving rise to the underpayment.
Although there is an increased tendency on the part of HMRC to seek to impose a double tax charge (perhaps in an attempt to 'punish' those taxpayers who have participated in arrangements which it does not approve of), most people would agree with the FTT that subjecting the same profits to tax twice cannot reasonably be said to be pursuing a legitimate aim in the public interest or to be striking a fair balance between the demands of the general interest of the community and the protection of the individual's rights.
The FTT has confirmed in this important decision that tax legislation, as with any other legislation, must be construed in a manner which is compatible with taxpayers' human rights. HMRC can therefore expect to have to face similar arguments to those relied upon by the taxpayer in Fessal in other cases in which it seeks to subject the same profits to double tax.
This blog is based on an article which was first published in Tax Journal on 3 June 2016.