Taxation – Stamp duty land tax – Tax avoidance scheme – Finance Acts 2003, 2012 and 2013 – Retrospective legislation passed making appellants’ tax avoidance schemes ineffective – Whether legislative changes unlawful – Whether appellants thereby deprived of a possession contrary to Article 1 of First Protocol to European Convention on Human Rights – Whether deprived of right to fair and public determination of civil rights and obligations under Article 6 of Convention – Claim dismissed
The appellant taxpayers took part in tax avoidance schemes which were designed to enable them to escape the payment of stamp duty land tax (SDLT) on their purchases of mostly residential property for their own use. The schemes were a variant on an earlier scheme involving the grant of an option, which had been outlawed by the Finance Act 2012; the new schemes sought to get around the effect of that legislation by a transaction involving a normal contract for sale at full market value and then, after exchange of contracts, a further agreement by which the buyer granted an option to a connected third party to purchase the property on the date when the original sale contract completed. The agreement was expressly stated not to be specifically enforceable, but, on the original contract completing, an option exercisable long into the future at a price just over the SDLT threshold was in fact granted to the third party. It was disputed whether there was any intention ever actually to exercise the option agreement.
The appellants sought permission to apply for judicial review of section 194(1)(a) and (2) of the Finance Act 2013, which, by amending section 45 of the Finance Act 2003 with retrospective effect, made it plain that SDLT was chargeable in full on transactions structured in accordance with the appellants’ schemes. They contended that the retrospective changes to the legislation were contrary to their right to the peaceful enjoyment of possessions under Article 1 of the First Protocol (A1P1) to the European Convention on Human Rights, and the right to a fair and public determination of their civil rights and obligations under Article 6 of the Convention, since they had deprived the appellants of the SDLT funds and of the chance of establishing the schemes’ effectiveness in the first-tier tribunal (FTT).
The Administrative Court held that the legislative changes did not deprive the appellants of any “possession” in the relevant sense and that neither A1P1 nor Article 6 was engaged; moreover, even if A1P1 had been engaged, the legislative changes were lawful because they were neither arbitrary nor unforeseeable and were proportionate. The judge accordingly refused permission to bring the claim: see R (on the application of St Matthews (West) Ltd) v HM Treasury [2014] EWHC 1848 (Admin); [2014] PLSCS 245. The Court of Appeal subsequently granted permission to apply for judicial review and retained that application for a substantive hearing.
Held: The claim was dismissed.
(1) The challenged legislative changes put beyond doubt what had previously been open to doubt, namely that the appellants’ schemes did not work. The schemes had not yet been challenged in the FTT and it was not appropriate for the court to usurp the FTT’s function in deciding whether the scheme was actually effective in the first place. The court’s task was confined to determining whether the judge had correctly held that the new legislation was not contrary to the Convention.
(2) A “possession” for the purposes of A1P1 had either to exist or to be a claim in respect of which an individual had a legitimate expectation that it would be realised. Such a legitimate expectation could not be based on just an arguable claim. The appellants could not establish that they had any more than an arguable claim to avoid paying tax on the original transfer of the properties to them. It could not avail them to argue that the legislation closing the tax avoidance loophole was an interference with the money that they would in due course use to pay the tax: R (on the application of Huitson) v Commissioners for HM Revenue and Customs [2011] EWCA Civ 893; [2011] STC 1860 considered; Burden v United Kingdom [2008] STC 1305 distinguished. The taxpayer could be assumed to have the relevant tax as a possession before it entered into the relevant transaction, namely the purchase of property, but, once it purchased that property under the original contract and transfer, SDLT became payable under sections 42 to 44 of the 2003 Act. Although the taxpayer also entered into an agreement for an option, which had provided it with an argument that the SDLT charged under sections 42 to 44 was not payable by virtue of section 45, the argument as to the meaning of section 45 before the legislative changes did not constitute an existing possession for A1P1 purposes because the claim was not sufficiently certain or established: Kopecky v Slovakia (App No 44912/98) (2005) 41 EHRR 43 applied. The money available to pay the SDLT was affected by the argument as to whether it was payable. While the money was a possession in one sense, it was a possession impressed with an arguable claim by the second respondents, which prevented it from being properly regarded as a possession for A1P1 purposes. A disputed amount was not in the taxpayer’s possession if the second respondents had an arguable claim to it: National & Provincial Building Society v United Kingdom [1997] STC 1466 applied. Where both sides claimed that they were entitled to the tax, and it was not clearly established whether it properly belonged to the taxpayer or to the second respondents, that prior question had to be decided before the taxpayer could claim to have been deprived by the legislative changes of a possession under A1P1. It followed that A1P1 was not engaged by the imposition of the legislative changes.
(3) Even if A1P1 had been engaged, the legislative changes would not have contravened it. It could not be automatically unlawful or inimical to the rule of law to close a tax loophole retrospectively, just because there were other tax loopholes which were left open. The legislative changes were not arbitrary in any relevant sense just because there were other existing tax avoidance schemes of which the government was aware and which it did not immediately tackle. Objective aspects of the appellants’ scheme, namely that it had attempted to get round the 2012 legislation, justified it being singled out. The government had made it clear that SDLT avoidance schemes based on sub-sales and options would not be tolerated and that retrospective legislation would be used to achieve that objective. The appellants could have been in no doubt about any of that before they decided to take advantage of a scheme devised purely to circumvent the precise wording of section 45(1A) of the 2003 Act as it was before the legislative changes. The legislative changes were simply enacted to make clear that the government was fulfilling its expressed intentions.
Nor did the changes fall foul of para 2 of the Protocol so far as it provided that such retrospective legislation would be “wholly exceptional”. First, the promise only applied “normally”, whereas the need to make sure that further unwarranted and abusive SDLT schemes were not devised to get round the 2012 legislation took the situation far away from the normal. Second, it was justified by “a significant risk to the Exchequer”, within the meaning of para 2, in the form of taxpayers thinking that the government did not mean what it said and that they could get away with minor variations on tax avoidance schemes once the unwieldy process of anti-avoidance legislation left a window for them to do so. Financial losses could be significant to the Exchequer without being the amount being huge in relative terms. The losses from the tax avoidance schemes, although not very large compared to the overall tax take, were significant to the Exchequer because they represented a number of taxpayers deliberately doing what the government had said it intended to stop. The judge had therefore been entitled to conclude that the changes were not arbitrary or unforeseeable, were lawful in substance and form and were proportionate.
(4) Article 6 of the Convention was not engaged. The legislative changes did not deprive the appellants of a fair and public hearing before the FTT and the courts in the determination of their civil rights and obligations. The concept of “civil rights and obligations” in Article 6 was an autonomous one and tax disputes fell outside it: Ferrazzini v Italy [2001] STC 1314. Tax disputes were not “civil” for the purposes of Article 6. It followed that the dispute as to whether SDLT was payable before the legislative changes was not “civil” and Article 6 was not engaged.
Jeremy Woolf (instructed by PWT Advice LLP) appeared for the appellants; Kieron Beal QC and Simon Pritchard (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
Click here to read transcript: R (on the application of APVCO 19 Ltd and others) v HM Treasury and another
