# Do Our Tax Systems Meet Rule Of Law Standards? Taxation and the Rule of Law. Wednesday 20 November 2013

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1 Do Our Tax Systems Meet Rule Of Law Standards? Taxation and the Rule of Law Wednesday 20 November 2013 #

2 Introduction Anne Redston Judith Freedman Jonathan Schwarz Q&A Page 2 Berwin Leighton Paisner

3 Rule of Law - is tax different? Certainty under the law: Subject (liability) Exchequer (receipts) Other citizens/taxpayers Concepts: Profits Reasonable to suppose Sole [or main] benefit/purpose Conduct involves dishonesty (whether or not it is such as to give rise to criminal liability) Page 3 Berwin Leighton Paisner

4 Judicial Approach (1) Tennant v Smith (1892) Cases, therefore, under the Taxing Acts always resolve themselves into a question whether or not the words of the Act have reached the alleged subject of taxation... it is a well-established rule that the subject is not to be taxed without clear words for that purpose, and also that every Act of Parliament must be read according to the natural construction of its words. Page 4 Berwin Leighton Paisner

5 Judicial Approach (2) IRC v McGuckian (1997) To the question What are clear words? he gave the answer that the court is not confined to a literal interpretation. He added There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded. This sentence was critical. It marked the rejection by the House of pure literalism in the interpretation of tax statutes. Page 5 Berwin Leighton Paisner

6 Judicial Approach (3) R v Environmental Secretary, ex parte Spath Holme Ltd (2001) Citizens, with the assistance of their advisers, are intended to be able to understand. Parliamentary enactments, so that they can regulate their conduct accordingly. They should be able to rely upon what they read in an Act of Parliament. This gives rise to a tension between the need for legal certainty, which is one of the fundamental elements of the rule of law, and the need to give effect to the intention of Parliament, from whatever source that (objectively assessed) intention can be gleaned. Lord Diplock drew attention to the importance of this aspect of the rule of law in Fothergill v Monarch Airlines Ltd [1981] AC 251, : The source to which Parliament must have intended the citizen to refer is the language of the Act itself. These are the words which Parliament has itself approved as accurately expressing its intentions. If the meaning of those words is clear and unambiguous and does not lead to a result that is manifestly absurd or unreasonable, it would be a confidence trick by Parliament and destructive of all legal certainty if the private citizen could not rely upon that meaning but was required to search through all that happened before and in the course of the legislative process in order to see whether there was anything to be found from which it could be inferred that Parliament s real intention had not been accurately expressed by the actual words that Parliament had adopted to communicate it to those affected by the legislation. This constitutional consideration does not mean that when deciding whether statutory language is clear and unambiguous and not productive of absurdity, the courts are confined to looking solely at the language in question in its context within the statute. That would impose on the courts much too restrictive an approach. No legislation is enacted in a vacuum. Regard may also be had to extraneous material, such as the setting in which the legislation was enacted. This is a matter of everyday occurrence. That said, courts should nevertheless approach the use of external aids with circumspection. Judges frequently turn to external aids for confirmation of views reached without their assistance. That is unobjectionable. the requirements of legal certainty might be undermined to an unacceptable extent if the court were to adopt, as the intention to be imputed to Parliament in using the words in question, the meaning suggested by an external aid. Thus, when interpreting statutory language courts have to strike a balance between conflicting considerations. Page 6 Berwin Leighton Paisner

7 Judicial Approach (4) R (Jaspers (Treburley) Ltd and others) v Food Standards Agency the Defendant cannot rely on its guidance to achieve this result either. Although guidance can have an important role to play in public law, it cannot impose an obligation on the citizen to pay a charge, levy or other form of tax without the clear and precise provision of legislation. In this context, guidance cannot be a substitute for legislation. Page 7 Berwin Leighton Paisner

8 Judicial Approach (5) Vestey v IRC proposition that whether a subject is to be taxed or not, or that, if he is, the amount of his ability is to be decided (even though within a limit) by an administrative body, represents a radical departure from constitutional principle. It may be that the Revenue could persuade Parliament to enact such a proposition in such terms that the courts would have to give effect to it; but unless it has done so, the courts, acting on constitutional principles, not only should not, but cannot validate it. When Parliament imposes a tax, it is the duty of the commissioners to assess and levy it on and from those who are liable by law. Of course they may, indeed should, act with administrative common sense I accept also that they cannot, in the absence of clear power, tax any given income more than once. But all of this falls far short of saying that so long as they do not exceed a maximum they can decide that beneficiary A is to bear so much tax and no more, or that beneficiary B is to bear no tax. This would be taxation by self-asserted administrative discretion and not by law. As the judge [Walton J] well said, One should be tax by law, and not be untaxed by concession. Page 8 Berwin Leighton Paisner

9 The Impact Of Europe (1) Section 2(1)(4) ECA 1972 Any enactment passed or to be passed... shall be construed and have effect subject to the foregoing provisions of this section Marleasing C-106/89 The obligation to interpret a national law in conformity with a directive arises when the provision in question is open to interpretation the national court must give precedence to the method which it enables it to construe in a manner consistent with the directive The obligation to [interpret] in conformity with a directive is restricted by Community law itself and in particular by the principles of legal certainty and non-retroactivity Page 9 Berwin Leighton Paisner

10 The Impact Of Europe (2) Revenue v IDT Customs [2006] I accept that under the principle of legal certainty the person affected by the legislation must be able to foresee the manner in which it is to be applied particularly where the legislation has financial consequences for him A taxpayer has a legitimate expectation that this principle will be observed. Moreover, a taxpayer is entitled to structure his business so as to limit his liability to tax and take advantage of any loopholes that he can find Gemeente Leusden (C487/01). However it is well known that the provisions of VATA 1994 have to be anticipated in conformity with the Sixth Directive It is not necessary to find a simple linguistic device. In my view it is unnecessary for this court to attempt to splice precise words into the language used by Parliament as if it was the Parliamentary drafter. It is not an objection to interpretation of this nature that it amends the language used by Parliament Page 10 Berwin Leighton Paisner

11 The Impact Of Europe (3) Vodafone 2 (High Court) There are no words in the [then CFC motive test] which using conventional rules of construction are capable of being construed as limiting so as to comply with [relevant EU freedom] as explained in the Cadbury case [T]the only way in which such a limitation could be read in was by the implication of words To do so would, in effect, be to amend s748(3), not to interpret it. Page 11 Berwin Leighton Paisner

12 The Impact Of Europe (4) Vodafone 2 (Court of Appeal) a)[the court] is not constrained by conventional rules of construction. b)it does not require ambiguity in the legislative language. c)it is not an exercise in semantics or linguistics. d)it permits departure from the strict and literal application of the words which the legislation has [used]. e)it permits the implication of words necessary to comply with Community law obligations. f)the precise form of the words to be implied does not matter. However An interpretation should not be adopted which is inconsistent with fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment. Page 12 Berwin Leighton Paisner

13 Gary Richards ) This document provides a general summary only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation.