In the Wealth of Nations published in 1776 Adam Smith argued a tax system should have four characteristics: equity, certainty, convenience, 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.”[1]
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.”[2]
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 diverge from the principle of certainty to counter the financial risks 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 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. At the same time 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.[3] At the time there was widespread consensus that the ‘Primarolo Statement’ marked a major change in the revenue authority’s approach – an attempt to halt the ‘arms race’ that had characterised the tax planning industry over the previous twenty years.
In 2008 the Labour Government introduced provisions to counter avoidance schemes that sought to exploit double taxation treaties and to frustrate avoidance legislation that had been introduced in 1987. The Government’s position was this measure - contained in section 58 of the Finance Act 2008 - clarified the law as it stood. At the time there were many complaints that this was unfairly retrospective. However efforts to change the Government’s position, or mount a legal challenge to overturn the legislation as being incompatible with the European Convention on Human Rights, proved unsuccessful.
This paper discusses the origin of the Rees Rules, and subsequent debates as to the use of retrospective changes in tax law, both in the context of ‘section 58’ and, more recently, in the context of the 2019 Loan Charge, which was introduced in the 2016 Budget and has also been widely criticised for being unfairly retrospective.
Notes :
[1] Treasury Committee, Principles of tax policy, HC 753, 15 March 2011, para 5
[2] OTS, Tax reliefs review: interim report, December 2010 p5