On 23 January 2020, the House of Commons published a report into the circumstances in which retrospective legislation can and has been used to counter perceived tax avoidance. The paper addresses debates regarding the use of retrospective changes in tax law, particularly in relation to section 58, Finance Act 2008 and the 2019 Loan Charge.
The paper comments that In the Wealth of Nations, published in 1776, Adam Smith argued that a tax system should have four characteristics: equity, certainty, convenience, and efficiency. Smith defined the principle of certainty as follows: “the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person.”
There remains a consensus that certainty is as important as it ever was in the design of the tax system. As the Office of Tax Simplification argued in a 2010 report: “taxes should not be arbitrary, the taxpayer should know his or her tax liability and when and where to pay it. It is important for a tax to be simple to understand, so that the taxpayer can calculate his or her liability.”
Retrospective tax legislation overturns this principle. It imposes or increases a tax charge on income earned, gains realised or transactions concluded at some time prior to the legislation being introduced. Quite often governments have been willing to balance the need for certainty with the risks to the Exchequer from tax avoidance where taxpayers may be able to take action – forestalling – to avoid the impact of a change in the law before it can take effect. For many years governments have taken a consistent approach to the circumstances in which retrospective legislation can be used to counter perceived tax avoidance, an approach codified in 1978 in the so-called “Rees Rules”.
In December 2004, the Labour government announced provisions to counter several schemes designed to avoid tax on employment income, and further to this Treasury Minister Dawn Primarolo made a written statement giving notice that the government would introduce retrospective legislation to tackle any similar avoidance schemes that came to light. At the time there was widespread consensus that the Primarolo Statement marked a major change in the revenue authority’s approach.
The paper discusses the origin of the Rees Rules, and subsequent debates as to the use of retrospective changes in tax law, most recently in the context of the 2019 Loan Charge, which was introduced in the 2016 Budget and which has been widely criticised for being unfairly retrospective.