Retrospective legislation, seeking to close a tax loophole relating to Stamp Duty Land Tax ("SDLT"), did not engage rights under the ECHR to the protection of property under Article 1 of Protocol 1 ("A1P1") or the right to a fair trial ("article 6"). Even if those rights were engaged the legislation was lawful, proportionate and compatible with the ECHR.
R (on the application of APVCO 19 Ltd) v Revenue & Customs Commissioners  EWCA Civ 648
1. Key points
- A1P1 is not engaged where taxpayers are deprived of an argument that they were not liable to pay tax. Such an argument is not a "possession" within the meaning of A1P1.
- Retrospective legislation to restore the original intention of amended legislation is not unlawful or disproportionate especially in light of warnings by the Chancellor of the Exchequer that it will introduce retrospective legislation to prevent schemes that circumvent amended legislation.
- Tax disputes are not within "civil rights and obligations" for the purposes of article 6.
The appellants participated in a tax avoidance scheme to avoid the payment of SDLT. Retrospective legislation in the Finance Act 2013 ("2013 legislation") made the appellants' scheme ineffective. The scheme was not challenged in the First-tier Tribunal but it was common ground that following the remedial 2013 legislation the scheme was no longer effective. The appellants' hotly contended that but for the 2013 legislation the scheme would have been effective.
Section 42 of the Finance Act 2003 ("FA 2003") provides for the payment of SDLT on “land transactions”. To avoid double taxation in cases where there is a sub-sale or other assignment of the right to acquire the land such that the original contract is not completed, s.45 provides a mechanism to place the taxation burden on the person ultimately enjoying the property. The SDLT was to be imposed on the aggregate of the consideration payable under the original and the secondary contracts. However, s45(3) states that the substantial performance of the original contract was to be disregarded. (The rules in s45 are referred to as the transfer of rights rules.)
Since 2003 the transfer of rights rules were used for tax avoidance. One particular scheme involved and agreement to purchase followed by the grant of an option to acquire in 35 years for a sum lower than the SDLT threshold which was never completed. To tackle this scheme the Finance Act 2012 added s.45(1A) to the FA 2003 which stated that the transfer of rights did not include the grant or assignment of an option ("2012 legislation"). In addition, the Chancellor of the Exchequer stated that he would not hesitate to move swiftly, without notice and retrospectively, if inappropriate schemes around the new rules were used.
The appellants' scheme used an agreement for an option instead of an option. In its original form, s.45(1A) did not specifically refer to agreements for options. Consequently, the 2013 legislation was introduced to capture agreements for grant or assignment of an option and made the appellants' scheme ineffective.
The appellants challenged the 2013 legislation as incompatible with their rights under A1P1 and article 6. This case was an appeal of two decisions. The first was the decision that the legislation was compatible with the ECHR. The second was a refusal of the appellants' application to cross-examine the respondent's witnesses.
In their arguments at first instance and the appeal, the appellants relied on the Protocol on tackling tax avoidance introduced in 2011 (the "Protocol"). The Protocol stated that retrospective tax legislation will be "wholly exceptional". It stated that "normally" retrospective legislation would only be announced where there would otherwise be a significant risk to the Exchequer and the changes prevent significant losses to the Exchequer.
3. The Court of Appeal's decision
The finding that A1P1 was not engaged in this case was upheld. Vos LJ and Floyd LJ reached this conclusion in slightly different ways.
Vos LJ focused on whether the money could be said to be a possession. Possession under A1P1 has an autonomous meaning including a wide range of economic interests and assets. A possession under A1P1 must either exist or be a claim in respect of which an individual has a legitimate expectation that it will be realised (not just an arguable claim).
There is authority that unpaid tax can be regarded as a possession within the meaning of A1P1. However, there is also authority that to deprive a person of an argument as to whether tax is or is not payable is not to deprive a person of a possession. The appellants argued that they were deprived of the money that they would have to pay as tax because of the legislative changes.
Vos LJ concluded that the primary effect of the legislation was to deprive the appellants of an argument that they were not liable to pay tax, which was not a possession under A1P1.
Floyd LJ found that the appellants did not establish that they were deprived of their money. Just as an arguable claim to possession is insufficient for A1P1, an arguable deprivation is insufficient.
Although A1P1 was not engaged the court considered whether there would have been an infringement of A1P1. Any interference with A1P1 must be lawful and proportionate.
The concept of lawfulness requires the existence of a domestic law and compatibility with the rule of law. In the sphere of tax, states are given additional deference in the exercise of their fiscal functions under the lawfulness test.
For legislation to be compatible with the rule of law it must have legal certainty and must not be arbitrary. It was held that the 2013 legislation was not unforeseeable or arbitrary. The fact that there were other tax avoidance schemes that the Government did not tackle did not make this arbitrary and unforeseeable. The Government's 2012 announcements made it clear that it would enact retrospective legislation to put beyond doubt that schemes based on the transfer of rights rules were caught by the 2012 legislation.
The Protocol was an extra-statutory announcement of Government intent and did not bind Parliament. Nonetheless, the Protocol did not render the 2013 legislation unforeseeable since:
- The conditions only apply "normally" and the need to prevent schemes that circumvent the 2012 legislation removes the situation from the normal;
- Significant risk has a broad connotation which included the risk that taxpayers may think that that they could get away with variations on avoidance schemes; and
- Although the losses to the Exchequer of £7 million were not large they were significant because they represented taxpayers deliberately doing what the Government intended to stop.
Regarding proportionality, it was held that the legislation struck a fair balance between public interest to ensure that everybody pays their share of SDLT and the protection of individuals' right to possessions. The Government enjoys a "wide margin of appreciation" in framing and implementing tax policies unless they are devoid of reasonable foundation. Retrospective legislation was not disproportionate especially since the purpose of the legislation was to reassert the original intentions of the 2012 legislation which pre-dated the implementation of the scheme.
The court confirmed that "civil rights and obligations" covered by the right to fair trial had an autonomous meaning. Tax disputes are not "civil" for the purposes of article 6. There was no analogy to be drawn between the approach to determine criminal charges (which takes into account domestic classification of an offence) and the approach to determine civil rights. Had article 6 been engaged, the legislative changes in any event satisfied the higher test of compelling grounds in the public interest.
The case reinforces the high threshold required for a court to declare retrospective tax legislation incompatible with rights under the ECHR. However, the facts of this case were weak given the specific announcements made by the Chancellor regarding the use of transfer right rules to avoid SDLT and there may be other circumstances where retrospective legislation is found to be incompatible with A1P1.
It is also worth noting that this case reiterated the general principle that cross-examination in judicial review would only be allowed in exceptional circumstances.