Contractors received a further blow against certainty in their tax affairs, when the government confirmed that it is prepared to use retrospective legislation to tax and fine contractors and other taxpayers.
During the Public Bill Committee review of the proposed amendment to Section 58(4) in the Finance Bill 2013-13 to 2013-14, Exchequer Secretary to the Treasury David Gauke insisted: “We must reserve the right to use retrospection in wholly exceptional circumstances, in line with the protocol we have introduced.”
His statement prompted the original sponsor of the motion to introduce the amendment, Conservative MP Steve Baker, to immediately back down and withdraw the clause: “Everybody engaged in tax avoidance should listen very carefully to what the Minister has said.” Without questioning Gauke’s statement, Baker simply added: “I beg to ask leave to withdraw the motion.”
Government license to target taxpayers it does not approve
This will particularly hit hard the 1,900 contractors who participated in the tax avoidance scheme that prompted the original Budget Note 66 (BN 66) in 2008 that introduced the retrospective taxation legislation. Between them, they are estimated to face a £220m bill in back taxes, interest and penalties.
The clause to amend Section 58(4) would have meant that the tax legislation applied to the scheme’s participants would only have applied after March 2008, when the tax avoidance scheme had closed, thus leaving the affected taxpayers free of any tax liabilities.
We must reserve the right to use retrospection 
David Gauke, Exchequer Secretary to the Treasury
And the Treasury’s decision to support retrospective taxation now leaves all taxpayers at the mercy of a government that can choose to apply its retrospective taxation protocol to any circumstances it deems “exceptional”.
“The rule of law is supposed to avoid tyranny”
Baker’s opening statement in support of voting through the amendment was stirring: “In this mother of Parliaments, it ought not to be necessary to have to move an amendment to defend that most fundamental of our institutions, the rule of law, but that is the essence of the new clause.”
Although Baker identified that the original scheme was created purely for the purposes of tax avoidance, enabling some contractors to pay virtually zero tax, and “seems too good to be true”, he went on to argue that the scheme was lawful prior to Section 58(4)’s introduction.
The rule of law is supposed to avoid tyranny. Tyranny is when the sand shifts under someone's feet and conduct they thought lawful is suddenly punished
Steve Baker MP
“One of the key points is that the situation needs to be tested in the courts, without the benefit of retrospective legislation,” asserted Baker. “The rule of law is supposed to avoid tyranny. Tyranny is when the sand shifts under someone’s feet and conduct they thought lawful is suddenly punished.
“It is a hallmark of despotism to have these things happen to people. They ought not to happen,” added Baker.
This strong opening by Baker makes his meek climbdown in the face of fellow Conservative Gauke particularly puzzling.
HMRC knew the scheme existed in 2002
HMRC was aware of the scheme before Section 58(4) was introduced, but did nothing. This, according to Conservative MP Nigel Mills, was the mistake: “Although this noxious scheme should have been closed down many years before it was, and it was a terrible error of judgment that that was not done, it is not right to use the power of the state in a draconian way to turn back time and pretend the scheme had been closed down at the start.
“That is the mistake here. We should admit it should have been closed down earlier, and close it down prospectively but not retrospectively.”
But Labour MP Catherine McKinnell responded by reminding the committee that the BN66 campaigners had failed to win its judicial review in the High Court: “The argument that [Section 58(4)] was contrary to human rights was dismissed on the grounds that although it was retrospective, the legislation was in the relevant circumstances proportionate and compatible with that right.”
“Parliament unconcerned” about tax loophole use
On a more positive note for those concerned about the potential abuse of retrospective legislation, McKinnell went on to highlight that, although the original legislation in 1987 to which Section 58(4) applies was introduced to tackle the abuse of double taxation treaties, no further action had been taken by government or HMRC since.
She said: “With the Minister pointing out the loopholes at the time, but no action being taken to close them, the campaign’s position is that Parliament tacitly gave a signal that it was unconcerned about their use.”
Legitimate protocol to introduce retrospective taxation
Gauke’s lengthy final statement in response to McKinnell, and which caused Baker to withdraw his motion, drew attention to the government’s 2011 Budget document ‘Tackling Tax Avoidance”.
This, he claimed, set out the criteria by which the government can introduce retrospective tax legislation: “Action is sometimes necessary…to protect the UK tax base. The priorities of reducing the deficit and ensuring a level playing field for all require firm action in tackling avoidance.”
In the case of BN66 and Section 58(4), it seems that it was sufficient to Gauke that “the criteria include a significant amount of tax is at stake; there is a history of abuse of this area of the legislation”.
Whilst not wishing to be drawn on the specifics of this particular case, ContractorCalculator CEO Dave Chaplin is concerned about the precedent set. “These criteria would appear to place the tax affairs of many, including contractors, in the frame for retrospective action,” he says.
“This is because there is a history of abuse by a small minority, and large sums of tax involved, in many areas of perfectly legitimate tax planning adopted by taxpayers who believe they are currently acting within the law. Many of these taxpayers will also have taken professional advice to confirm the legality of their actions.
Chaplin concludes: “The decision by the government not to support this amendment sends a chilling message to all taxpayers that their tax affairs are no longer certain. Gauke has explained that the government feels it reasonable in some circumstances to help itself to any taxpayer’s post-taxation income.”