Tax and the Rule of Law

Transcription

1 Tax and the Rule of Law April The Law Society. All rights reserved.

2 Tax and the Rule of Law The Rule of Law The Law Society believes that, in recent years, there has been a tendency on the part of government to allow the rule of law in taxation to risk being eroded in the interests of making the executive more effective, in particular in seeking to combat avoidance and to reduce the backlog of cases awaiting resolution in the tax tribunals. The Society is fully supportive of the government s objective to discourage avoidance and change the economic incentives associated with tax avoidance but is keen to ensure that opinion is not obtained by measures that erode the rule of law. Retrospective taxes Retrospective taxation is a clear example of a breach of the rule of law. It is fortunately rare in the UK. Nevertheless it does happen 1. Any form of legislation that takes effect on a date before the parliamentary procedures have been completed should be avoided. There will be cases where, given the risk to the exchequer, any government needs to take steps to combat avoidance outside the usual fiscal events and the usual legislative timetable. Those cases should be kept to an absolute minimum. The Protocol on Unscheduled Announcements of Changes in Tax Law (March 2011) is a statement of principle in this respect. The current protocol states that legislation which takes effect before the date of announcement will be 'wholly exceptional', but it does not define cases which fall within this category or give any comfort as to the cases which will not. In the Society's view, if it is to be permitted at all, such retrospective legislation should be reserved for the most extreme cases of abuse where the tax loss threatens to undermine the exchequer. Deliberate uncertainty or subjectivity in tax law Giving evidence to the Public Accounts Committee in December 2012, Jim Harra, director general, Business Tax at HMRC said this of the proposed General Anti- Avoidance Rule (the GAAR ): 'It will also create an additional level of uncertainty for the promoters and users of schemes. I believe that that will be a deterrent.' The concept of the rule of law implies as much certainty as possible as to what legal obligations are and, in this context, the statement causes us concern. Untaxed by concession As long ago as 1977, Walton J said that taxpayers should be taxed by clear words and not untaxed by concession 2. 1 See section 58 Finance Act 2008 and section 23 Finance Act Vestey v IRC [1977] STC 414 1

3 Tax law (in particular, anti-avoidance legislation) appears frequently to be designed more widely than is needed to target the perceived mischief. Government then allows HMRC to confine the legislation to the mischief by concessionary guidance. This risks damage to the rule of law by placing power in the hands of the executive. In particular section 30 Finance Act 2014 (avoidance schemes involving the transfer of corporate profits) appears to be an inherently broad and vague provision, the precise scope of which can only be determined by reference to HMRC guidance. Naming and shaming We have reservations about the approach adopted by the government in the Finance Act 2014 to name and shame the promoters of tax avoidance schemes. A further instance of naming and shaming can be found in the reformulated the Code of Practice on Taxation of Banks. Whilst naming and shaming individuals who have been convicted of tax evasion may be acceptable, the naming of individuals by the executive merely because it disapproves of some aspect of their (lawful) behaviour in relation to taxation is unfair. Government should not 'name and shame' an individual on essentially moral grounds, as it would naturally give rise to the impression of illicit behaviour where the behaviour is in fact not in breach of any laws. Access to the courts and rights of appeal The Society has concerns about the promulgation of new rules which seek to exclude or limit access to the courts. An example of this was contained in Finance Act If a taxpayer has made a return of his or her income on the basis of a tax advantage which HMRC believes, on the basis of a final judicial decision in another case, the taxpayer cannot validly claim, then, under the Finance Act 2014 provisions, HMRC can serve a follower notice on the taxpayer and require the taxpayer to make an accelerated payment of the tax in dispute. If the taxpayer believes that the notice is flawed on the grounds (i) that the relevant reduction of tax or other tax relief in his or her tax return does not arise from 'tax arrangements', or (ii) that the final judicial ruling identified in the follower notice is not applicable to the relevant reduction of tax or other tax relief in his or her tax return, the taxpayer does not have any right to appeal to the tribunal against the notice on the grounds that it is invalid. This absence of a right of appeal can amount to the denial of a basic human right. It will deter appeals (and, therefore, justice) in cases which HMRC regard as tax avoidance but which may not involve any element of avoidance at all. We accept that there is a very substantial backlog of tax cases awaiting a judicial hearing that needs to be cleared. However, denying the basic right of appeal is not a just way of achieving this desirable objective. The absence of a right of appeal in relation to decisions by HMRC that a bank has breached the Code of Practice on Taxation of Banks is another instance where full access to justice is being denied. It is vital that there be both an independent assessment of any decision by HMRC that an institution is not complying with the code or should be publicly named as such, and a proper appeals process. Whilst the proposal for an independent reviewer has been accepted by the government, there is still no right of appeal. The possibility of a judicial review does 2

4 not meet the need for an appropriate right of appeal. An appeal would decide the question whether or not the bank had breached the code, whereas judicial review would decide the question whether HMRC had acted irrationally and abusively in naming and shaming the bank for the alleged breach. Judicial review sets a much higher bar. New proposals Our final comments relate to measures which at the time of writing had not yet been passed into law: the proposal to allow HMRC to recover tax debts directly from bank accounts 3 ; and the proposal to introduce a strict liability criminal offence for failing to declare offshore income 4. We have made detailed submissions in response to the consultation papers for each of these proposals. As regards the first proposal, we are concerned that it would allow HMRC to stop taxpayers accessing their money prior to any judicial confirmation that HMRC's actions are warranted. We are concerned that the measures do not comply with data protection or human rights legislation. HMRC already has strong powers to recover tax debts through the courts. The proposed extension of HMRC s powers is both unnecessary and unconstitutional and the absence of safeguards enshrined in legislation causes further concern. The proposal should be withdrawn. As regards the second proposal, HMRC s press release points out that, at present, in order to secure a criminal conviction for evasion, it has to demonstrate that the taxpayer not only failed to declare offshore income but also intended to evade tax. The proposed measure will mean HMRC only has to demonstrate that the income was taxable and undeclared. We accept that this may mean that it will be easier to secure successful prosecutions of offshore tax evaders, but it may also render wholly innocent activity a criminal offence. It is important in tax legislation to maintain an appropriate balance between the powers of the executive and the protection of the individual. This proposal fails to achieve that balance and appears to breach the rule of law. It is of real concern that this issue has been mooted again in HMRC s recent consultation. 5 Proposals We recommend that: the Protocol on Unscheduled Announcements of Changes in Tax Law should be amended to set out the 'wholly exceptional' circumstances in which legislation which takes effect before the date of announcement might be regarded as acceptable. the protocol should be given greater force and importance. The Tax Professionals Forum should be made independent of government (so that it 3 Budget 2014 paragraph and Overview of Tax Legislation and Rates paragraph 2.30, and Autumn Statement 2014, paragraph No Safe Havens April Tackling tax evasion and avoidance paragraph

5 includes only independent members) and should be required by legislation to report annually to parliament on compliance with the protocol. a new Tax Law Charter should be adopted. The charter should set out the rule of law principles to which all tax legislation should adhere. It should include the right of access to the courts for a taxpayer. the Tax Professionals Forum should be required by legislation to report annually to parliament on compliance of tax legislation with the charter. the government/hmrc ought to be required to publish the reasoning as to how the relevant minister has certified that the Finance Bill or any other fiscal measure is compatible with the European Convention on Human Rights. the proposals to allow HMRC to recover tax debts directly from bank accounts and to introduce a strict liability criminal offence for failing to declare offshore income should only be legislated if the legislation itself contains safeguards appropriate to the consequences for the taxpayer concerned. Better law making The consultation process We welcome the five-stage consultation approach to tax policy-making adopted by the government in 2011 (the 'Tax Consultation Framework'). Anti-avoidance measures were excluded from the process. In our view, however, the new approach is (i) not always followed, and (ii) side-stepped by labelling new tax law as antiavoidance when it is no such thing. A case in point is the Finance Act 2014, which introduced changes to the way in which certain members of limited liability partnerships ( LLPs ) were taxed. When this proposal was first published, it was an anti-avoidance measure. Following initial consultation, the nature of the proposal changed markedly and became more widely applicable to professional partnerships. This was not anti-avoidance legislation but, nevertheless, there was no formal consultation of the kind envisaged by Tax Consultation Framework. The House of Lords Economic Affairs Committee was highly critical of this latter stage in the legislative process 6. Like the House of Lords, we are not alone in suggesting that the new approach to policy-making is not always adhered to. The Tax Professionals Forum, established to ensure that the government s commitments on better tax policy-making are subject to independent scrutiny, said this in its second annual report: 'It is pleasing to report that the period has shown a number of good examples where the five stages have been or are being followed, in particular the consultations on the changes to the CFC rules, the Statutory Residence test, the reform of the taxation of non-domiciliaries, tax relief for decommissioning and a number of others. These have resulted in the taxpayer having a clear 6 House of Lords Economic Affairs Committee report The Draft Finance Bill 2014 (March 2014) 4

6 understanding of government policy, and policies being developed more effectively and efficiently. In contrast, however, in other cases, consultations have started: part way through the process (such as that on the provisions relating to the transfer of assets abroad and gains made by offshore close companies), without a clear articulation of the policy involved (for example, on IR35 and Controlling Persons), or without any discussion of the policy (for example, the changes to SDLT on properties owned by non-residents through companies, investment funds and others and the cap on income tax reliefs).' 7 The legislative process At the time of the last general election, we highlighted the need to provide better information to those MPs who are charged with scrutiny of tax legislation. The need for better information and advice has only increased with the public and media focus on tax in recent years. At the time of the last election, we recommended the creation of a body of advisers to the Treasury Select Committee. A similar proposal was put forward by the Chartered Institute of Taxation. We believe that this is a proposal whose time has come. Proposals We recommend that: the five-stage consultation approach to tax policy-making should be placed on a more formal, perhaps even a statutory, footing. an independent panel of advisers is established and charged with advising the Treasury Select Committee on any proposed tax legislation. The members of the panel should be independent-minded tax professionals and academics, perhaps acting on a voluntary basis. 28 April Tax Professionals Forum Second Independent Annual Report, 27 March