In R (oao Cartref) v HMRC [2019] EWHC 3382 (Admin) (13 December 2019), the High Court granted permission for judicial review (JR) to only one of the five applicants (Cartref) and concluded that the loan charge legislation was compatible with the Human Rights Act 1998 and did not constitute a breach of article 1 protocol 1 (A1P1) or article 6.
As part of a circular lending arrangement, company directors received loans from a company other than their employer in respect of which no income tax or NICs were paid.
HMRC notified the applicants of its intention to: treat the companies or the directors as being from 5 April 2019 liable for tax and NICs unless a settlement was reached before that date (the loan charge can be imposed on certain arrangements dating back to 6 April 1999); and disallow the tax deduction in the amount of the loans made by the companies to the directors.
Although the High Court only granted JR permission to Cartref, the court still considered the substantive JR application of the other applicants as if they had been granted permission.
The High Court decided that the loan charge legislation was compatible with human rights law as it complied with the principle of lawfulness and pursued a legitimate aim by means reasonably proportionate to the aim sought to be realised. This was because:
the legislation has a valid objective to ‘deprive tax avoidance schemes of oxygen, and to ensure that people and companies bear their fair burden of tax’
this purpose is consistent with HMRC’s general message that rewards for services are taxable (a message consistently made by HMRC since at least 1975)
the legislation, which ‘involves discerning the line where action is needed to avoid measures which cut across the fair burden borne by those paying tax', is a matter for the executive rather than the courts. This is underlined by the second para of A1P1, ‘with its specific invocation of the control of property to secure the payment of taxes’;
in respect of these applicants, the court accepted 'there appears to be sufficient material in this case to find an assertion of tax avoidance' although it wouldn't go so far as HMRC who call it aggressive;
case law has consistently concluded that the balance falls heavily on the side of the public interest and demonstrates that retrospective legislation can comply with A1P1;
in R Sz v Hungary [2013] ECHR 41838/11, where the balance was found to fall on the side of the taxpayer, the tax was not only retrospective but also unsignalled and discriminatory;
the loan charge, however, was not unsignalled. It ‘followed a consultation process’ and ‘broad concerns as to taxing remuneration, and specifically … disguised remuneration schemes'.
While the court was concerned by the extent of the loan charge’s retrospectivity (20 years prior to the commencement of the legislation), it found that, for the particular claimants in this case, who entered into the loan arrangements in 2010 and 2013, there was no evidence of hardship. This was because:
they entered into these arrangements when ‘evidence suggests that a moderately well-informed taxpayer would know himself to be on risk, distantly in the case of Cartref and much more immediately by the time of the DES decision’; and
‘since before either of these schemes was entered into, HMRC were making it clear beyond peradventure that they regarded the overall approach (if not the previous iteration) as invalid’.
Why it matters: Although this JR claim failed, this decision leaves open the possibility that other taxpayers, who entered into loan arrangements at a time before overt warnings about the taxation of such arrangements were made, might be able to bring a JR claim that a less intrusive measure (less retrospective than 20 years) should have been implemented instead.
It is interesting to note that the changes to the loan charge legislation that are due to be included in Finance Bill 2020 will, among other changes, limit its retrospectivity so that it only applies to loans outstanding at 5 April 2019 that were made on or after 9 December 2010. On the basis of the Cartref decision, it is likely that the amended loan charge legislation should not breach human rights law.
In R (oao Cartref) v HMRC [2019] EWHC 3382 (Admin) (13 December 2019), the High Court granted permission for judicial review (JR) to only one of the five applicants (Cartref) and concluded that the loan charge legislation was compatible with the Human Rights Act 1998 and did not constitute a breach of article 1 protocol 1 (A1P1) or article 6.
As part of a circular lending arrangement, company directors received loans from a company other than their employer in respect of which no income tax or NICs were paid.
HMRC notified the applicants of its intention to: treat the companies or the directors as being from 5 April 2019 liable for tax and NICs unless a settlement was reached before that date (the loan charge can be imposed on certain arrangements dating back to 6 April 1999); and disallow the tax deduction in the amount of the loans made by the companies to the directors.
Although the High Court only granted JR permission to Cartref, the court still considered the substantive JR application of the other applicants as if they had been granted permission.
The High Court decided that the loan charge legislation was compatible with human rights law as it complied with the principle of lawfulness and pursued a legitimate aim by means reasonably proportionate to the aim sought to be realised. This was because:
the legislation has a valid objective to ‘deprive tax avoidance schemes of oxygen, and to ensure that people and companies bear their fair burden of tax’
this purpose is consistent with HMRC’s general message that rewards for services are taxable (a message consistently made by HMRC since at least 1975)
the legislation, which ‘involves discerning the line where action is needed to avoid measures which cut across the fair burden borne by those paying tax', is a matter for the executive rather than the courts. This is underlined by the second para of A1P1, ‘with its specific invocation of the control of property to secure the payment of taxes’;
in respect of these applicants, the court accepted 'there appears to be sufficient material in this case to find an assertion of tax avoidance' although it wouldn't go so far as HMRC who call it aggressive;
case law has consistently concluded that the balance falls heavily on the side of the public interest and demonstrates that retrospective legislation can comply with A1P1;
in R Sz v Hungary [2013] ECHR 41838/11, where the balance was found to fall on the side of the taxpayer, the tax was not only retrospective but also unsignalled and discriminatory;
the loan charge, however, was not unsignalled. It ‘followed a consultation process’ and ‘broad concerns as to taxing remuneration, and specifically … disguised remuneration schemes'.
While the court was concerned by the extent of the loan charge’s retrospectivity (20 years prior to the commencement of the legislation), it found that, for the particular claimants in this case, who entered into the loan arrangements in 2010 and 2013, there was no evidence of hardship. This was because:
they entered into these arrangements when ‘evidence suggests that a moderately well-informed taxpayer would know himself to be on risk, distantly in the case of Cartref and much more immediately by the time of the DES decision’; and
‘since before either of these schemes was entered into, HMRC were making it clear beyond peradventure that they regarded the overall approach (if not the previous iteration) as invalid’.
Why it matters: Although this JR claim failed, this decision leaves open the possibility that other taxpayers, who entered into loan arrangements at a time before overt warnings about the taxation of such arrangements were made, might be able to bring a JR claim that a less intrusive measure (less retrospective than 20 years) should have been implemented instead.
It is interesting to note that the changes to the loan charge legislation that are due to be included in Finance Bill 2020 will, among other changes, limit its retrospectivity so that it only applies to loans outstanding at 5 April 2019 that were made on or after 9 December 2010. On the basis of the Cartref decision, it is likely that the amended loan charge legislation should not breach human rights law.
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