Introduction
Securing the payment of taxes is an essential prerogative of the legislature. Adding to this, the incentive to tackle tax avoidance schemes provides the legislature an opportunity to enact Acts of Parliament that endow His Majesty’s Revenue and Customs (‘HMRC’) with unprecedented powers.1
One such example is the Finance Act 2014 (‘FA 2014’), which provides HMRC with the power to issue follower notices (‘FNs’) and accelerated payment notices (‘APNs’). FNs are issued to deter taxpayers from litigating where HMRC is of the belief that a previous ruling in HMRC’s favour would apply as precedent and defeat the taxpayer’s claim to the tax advantage.2 Failing to settle or withdraw appeals after a follower notice has been issued leads to a penalty of up to 30% of the ‘denied advantage’ (i.e. the amount of tax in dispute).3 The issuance of FNs paves the way for issuing an APN,4 requiring the taxpayer to pay upfront ‘the amount relating to the tax advantage that the use of the avoidance scheme tries to achieve’,5 accompanied with a penalty in case of non-payment.6
The stringency and retrospectivity of these measures have called into question their compliance with taxpayers’ fundamental rights under the common law and under the European Convention of Human Rights (‘ECHR’).7 This debate has been reignited in 2021 with R (on the application of Haworth) v HMRC (‘Haworth’),8 which concerned an appeal to an FN.
This article will assess how FNs and APNs pose substantial challenges to two fundamental rights, namely the right of access to courts under Article 6(1) of ECHR and the right to the peaceful enjoyment of possessions under Article 1 of Protocol 1 to the ECHR (‘A1P1’).
Following definitional clarifications in Part 1, Parts 2 and 3 consider Article 6(1) and A1P1 respectively. Part 4 analyses the courts’ proportionality assessment and Part 5 examines possible solutions to improve the balance between taxpayer rights and public interest. Essentially, the existence of substantial challenges to fundamental rights can only be justified on the basis that a precise proportionality assessment has been undertaken, as it is only then that courts can assess the burden of these measures on a case-by-case basis.
1. Definitional clarifications
1.1. The two-fold nature of the challenge
‘Challenge’ is intended in this article to mean a conflict between a fundamental right and the operation of the FN/APN provisions. The nature of the challenge is two-fold. First, litigants face the challenge of establishing the applicability of the right (due to the retrospectivity of the measures and the deference given to states regarding tax matters).9 Secondly, they face the challenge of proving interference with their rights is disproportionate, due to the indefeasible paramountcy of the need to tackle tax avoidance, advocated by Parliament and the executive, as a justification for the existence of these challenges.
1.2. Meaning of ‘retrospectivity’
What is central to the idea of ‘retrospectivity’ here is that the FN/APN regime introduced in the FA 2014 applies to schemes entered into before that date.10 In other words, the consequences of entering into a tax avoidance scheme pre-2014 are dealt with by a 2014 Act.
By contrast, McCombe LJ highlighted in R (on the application of Rowe and others) v HMRC (‘Rowe (CA)’) that the government, in its response to the March 2014 consultation and its Budget 2014 Policy Costings, did not consider – arguably incorrectly – APNs to have retrospective effect.11 Rather, they imposed a prospective liability on taxpayers in determining where the money ‘sits’ pending the resolution of the dispute, even if this was unforeseen when the scheme was entered into.12 This is in line with HMRC’s policy in removing the ‘cash flow advantage’, that is the tax money secured through the scheme.13
The government’s argument does have force, as the issuance of an APN does not close the legislative loophole that allowed the tax advantage in the first place. It does not change whether a given tax avoidance scheme is ‘effective’ or not (that is, whether it secures a tax advantage without being ‘noticed’ or litigated by HMRC). In that regard, it cannot be contended that the FA 2014 merely clarifies ambiguous tax law that allowed the tax advantage to exist in the first place. However, what matters is that the legal consequences of what happened in the past (the saving of tax money through the scheme) are governed by an Act passed after the scheme was entered into and the tax advantage secured (tax money saved before the FA 2014 entered into force).14
The facts of Rowe are illustrative of such retrospectivity: Mr Rowe was part of a film production partnership that incurred losses in 2005. A share of these losses was allocated to Mr Rowe, who made claims in respect of these losses against his income.15 HMRC wrote to Mr Rowe in 2014 that a partnership payment notice (an equivalent to APNs for partnerships) would be issued under FA 2014, sch 32 para 6(3) on the basis that the partnership losses were incurred following a tax avoidance scheme. The notice rendered the tax losses payable retrospectively, when they were not so payable pre-2014.
2. Deterring the pursuit of litigation
FNs/APNs pose a substantial challenge to a taxpayer’s right of access to courts under Article 6(1) of the ECHR16 due to, inter alia, the FNs deterring litigation by imposing a penalty for failing to settle with HMRC or withdraw an appeal, a lack of a right to appeal against APNs or a right to ‘make representations’ (i.e. to argue a case) before the issuance of an APN.17
However, the limb of Article 6(1) relating to civil law disputes requires the issue in the case to relate to the ‘determination of his [the applicant’s] civil rights and obligations’.18 English courts appear slow to accept the categorisation of a tax matter as a ‘determination of civil rights and obligations’.19 For instance, Simler J in Rowe (HC) rejected the argument that a PPN was a ‘peremptory demand by HMRC for payment of monies’ that could give rise to future liabilities, and hence, as determining civil rights.20
The applicability of Article 6(1) is more generally eroded by the fact that tax matters are a competence reserved for states. In Ferrazzini v Italy (‘Ferrazzini’),21 the European Court of Human Rights (‘ECtHR’) held, ‘tax matters still form part of the hard core of public-authority prerogatives’.22 Ferazzini concerned tax reductions claimed on the transfer of land to a limited liability company for the purposes of touristic farm holiday activities. Tax was paid taking into account this reduction. The Italian tax authorities issued a notice that payment of that remaining tax was due, with a 20% penalty if not paid in time.23 This was appealed by the taxpayer, but the proceedings were still pending in 2000 despite being started in 1988. An application was made under Article 6(1) on the basis that the ‘determination of his civil rights and obligations’ were not made ‘within a reasonable time’.24 The Court rejected the applicability of Article 6(1) to this dispute as a determination of the tax owed was not a ‘determination of civil rights and obligations’.25
This approach could be justified on the basis that states are better placed than the ECtHR to decide what types of tax to impose in light of their political, economic and social needs.26 However, this should only be a starting point for courts in their reasoning and not a reason to turn a blind eye to the intrusiveness of such measures. Judge Ress in his Concurring Opinion in Ferazzini referred to two specific aspects of tax legislation that would warrant court intervention: measures with ‘immediate’ enforcement and measures requiring payment without providing taxpayers the ability to request a stay in proceedings where liability is disputed.27
In that case, the inability of taxpayers to request a stay in the proceedings and the ‘immediate enforcement’ of the measure pending a 20% penalty could have been a sufficient reason for the Court to intervene. Judge Ress considered that states are stretching beyond their prerogative in enacting these measures, which would justify the applicability of Article 6(1). The measures in Ferazzini mirror the FNs and APNs, in that both measures require the taxpayer to settle with HMRC or not pursue litigation before payment of the ‘denied advantage’. How wide the states’ discretion should be in tax matters is a dispute beyond the scope of this article. What is relevant here is that Judge Ress’ approach should be preferred when considering whether FNs and APNs infringe the right of access to courts due to their deterrent and punitive effects.
Interestingly, the ECtHR treats penalties and tax assessments differently. The safeguards under the criminal limb of Article 6(1) apply to tax proceedings involving a surcharge, even as low as 10%, insofar as the surcharge is substantial and constitutes a means of punishment to deter re-offending.28 Both FN and APN penalties could satisfy this.29
The criminal limb is, however, not applicable to the initial payment required under the APN as such, if it qualifies as a ‘claim for tax’.30 If HMRC’s submission above that the regime only creates a prospective liability were to be accepted, the amount under the APN could arguably be held to be a penalty due to its punitive and deterrent effect.31
Yet, if we are to focus on the punitive and deterrent effect of measures, the rigid distinction between what comes under the criminal limb of Article 6(1) and what is excluded under the civil limb of Article 6(1) becomes fragile. This was highlighted by Judge Lorenzen in his Dissenting Opinion in Ferrazzini. The judge explained that it is absurd that the ECtHR has made efforts in bringing a dispute involving tax fines with deterrent and punitive effects under Article 6(1), when a tax assessment with a similar effect is excluded.32
As a conclusion, what the Court should be focused on is the burden imposed on the taxpayer by punitive and deterrent tax measures, whether they concern an initial tax assessment or a penalty. Substance should prevail over form. This burden is ultimately determined on a case-by-case basis, which, as explained below, justifies the importance of reaching the proportionality analysis.33
3. Interference with personal possessions contrary to A1P1
The text of the ECHR does not expressly prohibit ‘retrospective civil legislation’.34 To succeed in an A1P1 claim35 (beyond proving that a tax legislation is retrospective), a taxpayer must prove the following elements: (1) the taxpayer has ‘possessions’, and (2) the interference with their ‘possessions’ is not provided for by law, or (3) the interference is ‘manifestly without reasonable foundation’.36
3.1. Proving ‘possessions’
The retrospective operation of APNs37 impresses money secured through tax avoidance with a claim by HMRC, such that this money does not constitute (and indeed retrospectively never constituted) a possession of the taxpayer. Under the ECHR, the presence of a ‘genuine dispute’ or ‘arguable claim’ is insufficient to prove ‘possessions’.38 The issuance of APNs creates a ‘presumption against the taxpayer’ that the ‘money’39 lies with HMRC40 and an asymmetry between what each party has to prove. Tainting taxpayer money with HMRC’s ‘arguable claim’ is enough to remove it from the category of ‘possessions’, but the taxpayer’s ‘arguable claim’ is not enough to put the money back into that category. It could be argued that shifting this burden on the taxpayer is justified. After all, HMRC could be held to have satisfied their own burden in finding a case as an applicable precedent to the situation of the taxpayer targeted by the FN. However, FNs deter the pursuit of litigation by incentivising taxpayers to settle or abandon their appeal, so that the taxpayer may not even have an opportunity to argue that the precedent cited in the FN does not apply (especially if the A1P1 right is inapplicable due to retrospectivity).
By contrast, McCombe LJ in Rowe noted that APNs do not provide HMRC a proprietary interest, but only a claim over monies in anticipation of a future tax liability, that may or may not be established.41 This article favours McCombe LJ’s approach as this would allow a court to proceed to the proportionality assessment.42 What is important is not necessarily that the taxpayer succeeds, but rather the taxpayer has an opportunity to argue their case. This accords with the view that the effects of retrospectivity should be assessed at the proportionality stage.43
3.2. Unlawfulness
Although considered as an interference per se,44 taxation is – simply put – usually justifiable as lawful as it is an interference provided for by legislation (and not arbitrarily).45 The ECtHR considers ‘foreseeability’ as inherent in the quality of a norm as ‘law’ as it ‘enable[s] citizens to regulate their conduct’.46 Yet, the retrospectivity of these measures does not provide taxpayers with an opportunity to arrange their financial conduct with the knowledge of that legislation.47 Arguments had been advanced in Rowe that the retrospectivity of the measures rendered them unforeseeable48 and unpredictable.49 These, however, did not succeed as retrospectivity was never held to contravene lawfulness, even when generating uncertainty.50
4. Proportionality
Proving the existence of substantial challenges to taxpayers’ fundamental rights is not sufficient to prove actual violation of those rights. In all of these rights is embedded a proportionality assessment, a cost-benefit analysis between the level of interference and the virtues of the measures. As analysed below, this is rarely concluded in favour of the taxpayer.
4.1. Aims and legitimacy
In the proportionality assessment, the aim of a measure determines the intrusiveness of the measures adopted to achieve them. Regarding FNs, the aims are to ‘deter further litigation’ and ‘reduce the administrative and judicial resources’ for ‘unmeritorious’ claims.51 Regarding APNs, the aim is to remove the ‘cash flow advantage’ acquired through the tax avoidance scheme pending resolution of the dispute.52 Both measures have a broader aim of tackling tax avoidance.53 These aims must be ‘legitimate’ as per Lekić.54 Interfering with possessions for tax purposes is an explicit carve-out in A1P1.55 More broadly, the aim of tackling tax avoidance is considered enough to qualify these aims as legitimate as it is widely accepted to be in the interest of the public.
4.2. Proportionality
The efficacy of the measures is not in doubt: it is estimated that £5.1bn and £2.1bn will be collected respectively from individuals and businesses through APNs.56 However, there must be a ‘relationship of proportionality’ between the means and the aims; the interests of the taxpayers against those of the community.57
4.2.1. Proportionality regarding retrospectivity
Retrospectivity can be adequately justified on two grounds. The first ground is that the FN/APN measures target tax avoidance.58 Judges appear slow to find a violation simply due to retrospectivity.59 Second, the FN/APN measures have a remedial, or ‘curative’,60 nature.61 The ECtHR in NKM v Hungary acknowledged that ‘retroactive taxation can […] remedy technical deficiencies’,62 such as the existence of tax loopholes. In the case of FNs, such ‘corrections’ are only brought indirectly as the legislative provisions creating those tax loopholes are not textually remedied. Rather, FNs ‘indirectly’ designate which schemes are ineffective through the use of precedents. What is directly remedied is the tax gap by forcing taxpayers to give up their tax advantage.
4.2.2. Proportionality regarding the measures
Despite its intrusiveness, the FN/APN regime does not, de facto, offend proportionality, on two grounds. The first ground is that courts are conscious of the gravity of issuing FNs/APNs and interpret the FA 2014 accordingly. For instance, the Court in Haworth established a very high threshold for believing that a precedent would apply before issuing an FN,63 by following Lord Reed’s approach to statutory construction in R (UNISON) v Lord Chancellor (Equality and Human Rights Commission and another intervening) (Nos 1 and 2) (‘UNISON’).64 A comparable high threshold was confirmed in Rowe for APNs.65
The reasons for interpreting legislation restrictively should be remembered by courts when assessing whether the substantiality of the challenge to taxpayer rights merits the finding of a violation. This is because the purpose of curbing tax avoidance provides an avenue for courts to interpret legislation over-inclusively. For instance, the Court in R (on the application of Sword Services Ltd and others) v HMRC held that Schedule 32 paragraph 3 of the FA 2014 on PPNs includes both general and limited liability partnerships.66
The second ground is that the courts consider the FA 2014 comprises sufficient procedural safeguards. For instance, the courts consider that the availability of judicial review satisfies Article 6(1).67 Yet, courts appear to analyse proportionality in a broad and overgeneralised way and overlook the fact that finding a measure as being proportionate for one taxpayer does not necessarily mean it is necessarily so for another taxpayer. For instance, courts have yet to consider the possibility of a less intrusive alternative to the FN/APN regime.68 Overall, the courts’ approach needs refinement.
5. Any solutions?
5.1. Modification of the current regime
The easiest – and most drastic – way to eliminate the substantial challenges to taxpayer rights would be to repeal the FN/APN provisions, not least because they have proven to undermine fundamental rights. Illustrative of this is that FNs are issued on the assumption that the taxpayer will not succeed in light of the precedent cited. The issue with focusing on the likelihood of success is that the right to access courts is not result-focused, but rather a procedural promise made to the taxpayer. Hence, FNs are inherently incompatible with the right of access to courts.69
The reversal of the FN regime does not mean that HMRC’s arsenal for tackling tax avoidance is emptied, as other avenues exist for issuing APNs.70 Alternatively, the measures could be rendered prospective only. The latter would still deter taxpayers from entering into such schemes, as the FA 2014 does not directly modify the legislation that prima facie presents the loophole. For instance, an FN does not change the wording of the legislation that created the tax loophole, it only designates what tax schemes are ineffective in producing a tax advantage based on a past decision deemed relevant in the immediate case.
Yet, considering that 85% of the 65,000 open cases on marketed tax avoidance schemes occurred in 2009-2010 or earlier71 and the relative success of these measures, neither solution is realistic. States enjoy a ‘wide margin of appreciation in taxation’ and courts will respect Parliament’s legislature due to its supremacy.72
5.2. A surgical proportionality assessment
If existing laws are to be preserved, the best avenue would be to ensure that rights are adequately weighed. Two necessities arise. First, the courts must reach the proportionality stage to assess whether the existence of substantial challenges stemming from the use of FNs and APNs are justified. This implies that it is preferable to adopt approaches that would prioritise the prima facie applicability of the Convention right.73
Second, the courts must perform this with surgical precision.74 At times, courts suffer from providing blanket justifications. For instance, the courts over-estimate the availability of judicial review to argue that the right of access to courts is adequately protected. However, such contentions are arguably not good enough. Quite simply, this avenue may be time-barred if a taxpayer is obliged to wait for HMRC to have concluded the appeal process under Section 222 of the FA 2014.75
Most notably, the policy rationale of tackling tax avoidance appears over-emphasised. Even putting the taxpayer at risk of bankruptcy for a ‘temporary advantage of cash flow’ was outweighed by the deprivation of the ‘public purse of significant sums for lengthy periods’.76 Although such measures may be legitimate, they cannot be dismissed as being proportionate merely because they counteract a tax advantage and ‘shift where the money sits in the interim’.77
Proportionality should be assessed on a case-by-case basis, especially since the broad wording of the FA 2014 creates a risk of over-inclusiveness.78 This explains why reaching the proportionality assessment is crucial: it is only at this stage that courts consider taxpayers’ individual circumstances.79 This also applies for assessing whether retrospectivity casts a ‘disproportionate and excessive burden’ on the individual.80
5.3. Practical and constitutional considerations
The practical considerations that underpin the FN/APN regime are of importance. Ideally, if litigation were perfectly efficient, there would be no need to resort to such measures. Conducting a more detailed proportionality analysis under this approach might run counter to the aims of the FA 2014 by increasing tax litigation. However, this does not necessarily result in the number of cases increasing, as a case could very well be resolved at first instance. Lower courts are competent to conduct the proportionality analysis as they are primarily responsible for applying the law to the facts.81 Higher courts are rightly reluctant to disturb such factual findings and they will only intervene in the lower courts’ analysis if the latter have misunderstood the law or reached an unreasonable conclusion.82
Relying on proportionality appears to promote judicial activism and creates a risk of encroachment on fiscal and executive powers. What is noteworthy, however, is that proportionality is a tool heavily relied upon both in statute and at common law. As emphasised by Lord Sales, proportionality can be found in Section 19 of the Equality Act 2010 (on indirect discrimination), just as it can be found in testing the validity of a penalty clause in contract.83
Although deciding to what extent rights are protected is within the purview of Parliamentary sovereignty, courts are best placed to deal with conflicts that arise on an individual level. Legislation establishes broad rights while courts ensure that specific application of those rights is in line with those broader principles.84 Thus, encouraging courts to conduct a proportionality analysis does not trespass upon Parliament’s decision-making powers, provided the FN/APN regime is retained accordingly.
5.4. Is such protection deserved?
A possible counterargument is that taxpayers engaged in schemes attracting FNs/APNs should accept the consequences of their actions. For instance, Blackwell criticises the readiness of the Court to apply UNISON in Haworth, stating that the justifications for protecting that right in employment (e.g. creating positive externalities like increased compliance with law) were not applicable to the FN/APN regime geared at tackling anti-social behaviour.85 He concludes that Parliament could not have wished to protect the right of access to courts for taxpayers subject to the FN/APN regime to the same extent as employees in UNISON, not least because HMRC failing in litigation may undermine tax morale.86
Two arguments can be made against this. First, the FN/APN regime cannot change the nature of litigation as a zero-sum game. The fact that a case pursued by a taxpayer may set a disastrous precedent for HMRC (e.g. in establishing that a precedent used in an FN does not actually apply to the facts of the litigated case) should not be a sufficient reason to legitimise a substantial challenge to a taxpayer’s right to access courts. Indeed, there should conceivably be a high bar for inferring that Parliament intended to abridge a right as fundamental as that of access to courts. It is a procedural right that should not be conditional on the substance of the proceedings or the success of HMRC. Thus, the focus must be on whether there is a ‘real risk’ that access to courts will be prevented.87
Second, the potentially ‘anti-social’ character of the taxpayer’s conduct does not warrant the inapplicability of fundamental rights. The tenacity of these rights against erosion is what renders them prima facie ‘fundamental’.88 What is crucial is not that the taxpayer succeeds, but that the taxpayer is allowed to have the proportionality of the interference assessed by a court.
Conclusion
FNs/APNs pose substantial challenges to the fundamental right of access to courts guaranteed by Article 6 and Article 1 Protocol 1. The substantiality of the challenges is due not only to the retrospective nature of the measures, but also to judicial deference to the state’s tireless crusade against tax avoidance. The challenges faced by taxpayers are two-fold: establishing the applicability of the right and proving disproportionality. Courts are unlikely to find disproportionality given the paramountcy of tackling tax avoidance – this is justified. Nevertheless, the imbalance between the interests of taxpayers and those of the state could be improved by refining what is currently an imprecise proportionality assessment.
[1] A ‘tax avoidance scheme’ is defined by HMRC as being the ‘bending the rules of the tax system to try to gain a tax advantage that Parliament never intended’, usually through ‘artificial transactions that serve little or no purpose other than to produce this advantage’: HMRC, ‘Guidance: Introduction to tax avoidance’ (26 May 2022) <www.gov.uk/guidance/tax-avoidance-an-introduction> accessed 8 January 2023.
[2] See further Finance Act 2014 [‘FA 2014’], ss 204-206.
[3] Originally 50% under FA 2014, s 201, 208-212, subsequently modified by FA 2021, s 119; sch 28 para 3(3). A more exhaustive definition of ‘denied advantage’ was provided by Simler J in R (on the application of Rowe and others) v HMRC [2015] EWHC 2293 (Admin), [2015] BTC 27 (‘Rowe (HC)’) at [48]: ‘The denied advantage is so much of the amount which the taxpayer has asserted as a tax advantage but which HMRC considers will not ultimately be a tax advantage once the tax dispute is finally resolved’.
[4] FA 2014, s 219(4)(a).
[5] HMRC, ‘Tax Avoidance Schemes – accelerated payments’ (August 2022), </www.gov.uk/government/publications/compliance-checks-tax-avoidance-schemes-accelerated-payments-ccfs24/tax-avoidance-schemes-accelerated-payments> accessed 8 January 2023.
[6] FA 2014, s 226.
[7] Convention for the Protection of Human Rights and Fundamental Freedoms, Rome, 4.XI.1950 as amended by Protocols No. 11 and No. 14 <www.echr.coe.int/documents/convention_eng.pdf> accessed 8 January 2023. The Convention is implemented via the Human Rights Act 1998 (‘HRA 1998’), which incorporates into UK law the ECHR Articles via HRA, sch 1.
[8] R (on the application of Haworth) v HMRC [2021] UKSC 25, [2021] 1 WLR 3521.
[9] Such deference can be observed in the ECtHR case law, where the Court leaves scope for a wide margin of appreciation regarding ‘general measures of economic or social strategy’: Wallishauser v Austria (No 2) App no 14497/06 (ECtHR, 4 November 2013) [65]. Such deference can also be observed in UK case law: The Queen on the Application of British Aggregates Associates, Cloburn Quarry Company Limited, Sherburn Minerals Limited v Her Majesty’s Treasury [2002] EWHC 926 (Admin), [2002] 2 CMLR 51 [121]-[122]. For further information, see Jonathan Peacock, ‘The “Margin of Appreciation” Afforded in the Tax Tribunals: is there any Limit to Judicial Deference?’ [2017] 4 British Tax Review 404.
[10] This accords with what some of the existing literature understands ‘retrospectivity’ to denote: Melvin R.T. Pauwels, ‘Retroactive Tax Legislation in View of Article 1 First Protocol ECHR’ (2013) 22(6) EC Tax Review 268. At times, ‘retrospectivity’ and ‘retroactivity’ are used interchangeably: National & Provincial Building Society, the Leeds Permanent Building Society and the Yorkshire Building Society v the United Kingdom Apps no 21319/93, 21449/93 and 21675/93 (ECtHR, 23 October 1997) [22] (‘retrospectiv[e]’) and [56] (‘retroactive’) (‘NBS’). Yet, some academics argue that a difference exists between ‘retroactivity’ and ‘retrospectivity’. Bobbett, amongst others, argues retroactivity relates to situations where a statute ‘alter[s]…the past’ whereas retrospectivity is ‘for statutes that recognise past transactions but alter the consequences of them in the future without changing the past’: Catherine S Bobbett, ‘Retroactive or Retrospective? A note on terminology’ [2016] (1) British Tax Review 15, 17. Sometimes, a similar definition is attributed to ‘retroactivity’. For instance, Lord Reed in AXA General Insurance Ltd and others v The Lord Advocate and others (Scotland) [2011] UKSC 46, [2012] 1 AC 868 at [117] argued that ‘retroactive effects’ occur where ‘the legal consequences of what was done in the past will be governed…by an Act passed many years later’.
[11] R (on the application of Rowe and Others) v HMRC [2017] EWCA Civ 2105, [2018] 1 WLR 3039 [81]: ‘[t]here is no retrospective effect as regards interest as Parliament did not require taxpayers to pay interest retrospectively’.
[12] Rowe (CA) (n 11) [213] (McCombe LJ); Rowe (HC) (n 3) [21] (Simler J).
[13] HMRC, ‘Guidance: follower notices and accelerated payment notices’ (7 March 2022) <www.gov.uk/government/publications/follower-notices-and-accelerated-payments/follower-notices-and-accelerated-payments#accelerated-payments> accessed 8 January 2023.
[14] This interpretation is in keeping with the purpose of the FA 2014 regime in countering the consequences of tax avoidance: R (on the application of Walapu) v HMRC [2016] EWHC 658 (Admin), [2016] 4 All ER 955 (‘Walapu’) [97] (Green J), cited with approval by Arden LJ in Rowe (CA) (n 11) at [79]-[82]; Rowe (HC) (n 3) [145] (Simler J). The case of Walapu concerned an APN issued following an enquiry conducted by HMRC into a tax avoidance scheme that involved the taxpayer reporting losses and earning a refund from HMRC.
[15] The Court of Appeal in Rowe (CA) (n 11) at [21] referred to these as ‘carry back’ claims, ‘sideways claims’ and ‘carry forward’ claims, depending on whether they were off-set against the income from previous, current or future years.
[16] Golder v the United Kingdom App no 4451/70 (ECtHR, 21 February 1975) [28]-[36].
[17] Walapu (n 14) [101]. Other procedures do exist like FA 2014, s 214, s 222.
[18] This expression has an autonomous meaning: Baraona v Portugal [1987] ECHR 13 [42]. As the ECtHR has further expounded, what relates to a ‘determination of his [the applicant’s] civil rights and obligation’ cannot solely be interpreted pursuant to a State’s domestic law as it is a term derived from the ECHR: Grzęda v Poland [GC] App no 43572/18 (ECtHR, 15 March 2022) [287].
[19] UK courts have a duty to consider relevant ECtHR judgments on disputed Convention rights pursuant to section 2(1) of the HRA 1998.
[20] Rowe (HC) (n 3) [149], [152]. A contrary approach was advanced by McCombe LJ in Rowe (CA) (n 11) at [214], where he held that the notices were not ‘a claim to tax as such’ (i.e. an initial liability to pay tax) by relying on HMRC’s argument that the measures were not retrospective. McCombe LJ’s reasoning is yet to be followed in a subsequent case. In fact, his reasoning appears contrary to the more recent decision of the High Court in Re Moorcourt Holdings Ltd [2019] EWHC 172 (Ch) at [27.3] that APN payments were ‘in respect of tax’.
[21] Ferrazzini v Italy App no 44759/88 (ECtHR, 12 July 2001). This was confirmed again in Jussila v Finland App no 73053/01 (ECtHR, 23 November 2006) [29].
[22] Ferrazzini (n 21) [29]. This was cited by Simler J in Rowe (HC) (n 3) at [150]-[151] and Arden LJ in Rowe (CA) (n 11) at [151].
[23] Ferrazzini (n 21) [10]-[13].
[24] ibid [14]-[15].
[25] ibid [29]-[31].
[26] Di Belmonte v Italy App no 72638/01 (ECtHR, 16 June 2010) [41]. The ECtHR is also more concerned about the rights of participants to a criminal trial that seek to prove an accusation is unfounded rather than those in civil trials seeking compensation for damage: Registry of the European Court of Human Rights, ‘Guide on Article 6 of the European Convention on Human Rights: Right to a fair trial (civil limb)’ (Council of Europe/European Court of Human Rights 2022) <www.echr.coe.int/documents/guide_art_6_eng.pdf> [92] accessed 8 January 2023.
[27] Ferrazzini (n 21) Concurring Opinion of Judge Ress O-I3.
[28] Jussila (n 21) [38]-[39].
[29] In fact, the applicability of the criminal limb to an APN appears to be assumed in Rowe (HC) (n 3) by Simler J who proceeds to the proportionality assessment without further considering whether the safeguards under Article 6(1) apply: Rowe (HC) (n 3) [153].
[30] Rowe (CA) (n 11) [152].
[31] Such an argument is yet to be considered in case law.
[32] Ferrazzini (n 21) Dissenting Opinion of Judge Lorenzen [8]. The judge also reasoned that the classification of a dispute as ‘civil’ or ‘criminal’ could be a matter of luck, depending on whether the proceedings relating to the penalty and to the assessment are joined in a given jurisdiction. The judge concluded that an interpretation based on such randomness is unsatisfactory.
[33] An alternative approach would be to render the ECHR fully applicable to tax matters, for instance by enacting a ‘tax protocol’ to the ECHR to ensure cases like Ferrazzini no longer undermine taxpayer claims: Philip Baker, ‘60 Years of the European Convention on Human Rights and Taxation’ (2021) 61(12) European Taxation 526, 533.
[34] A, B, C and D v the United Kingdom (1981) 23 DR 203 (‘ABCD’).
[35] This right is qualified as ‘fundamental’ by Sir Ross Cranston in the High Court case of The Queen (on the application of Geoffrey Richard Haworth) v HMRC [2018] EWHC 1271 (Admin), [2018] STC 1326 (‘Haworth (HC)’) [90].
[36] James and Others v the United Kingdom App no 8793/79 (ECtHR, 21 February 1986) [43]-[47].
[37] A1P1 claims concern APNs rather than FNs. As Sir Ross Cranston explains in Haworth (HC) (n 35) [113], the issuance of an FN does not require payment. FNs and APNs are analysed in combination here.
[38] Kopecký v Slovakia App no 44912/98 (ECtHR, 28 September 2004) (GC) [41], [48]-[52]. ‘Possessions’ has an autonomous meaning in the Convention, which signifies that the meaning of ‘possessions’ is proper to the ECHR text and case law: Anheuser-Busch Inc v Portugal App no 73049/01 (ECtHR, 11 October 2005) (GC) [63].
[39] This money is referred to as the ‘understated tax’ in FA 2014, ss 220(3)-(5) (when a tax enquiry is in progress) and as the ‘disputed tax’ in FA 2014, ss 221(3)-(4) (pending an appeal). Put simply, these expressions refer to the tax advantage secured under the avoidance schemes and that HMRC seeks to remove from the taxpayer’s possession pending resolution or settlement of the tax dispute (e.g. following the issuance of an FN).
[40] Henning M Jacobsen, ‘Accelerated Payment Notices and Follower Notices in the UK: An Affront to Justice?’ [2020] 48(2) Intertax 250, 259. This is referred to as the money being ‘impressed’ with HMRC’s claim: R (on the application of APVCO 19 Ltd and others) v HM Treasury & Anor [2015] EWCA Civ 648, [2015] STC 2272 [46] (Vos LJ); Rowe (HC) (n 3) [120], [126] (Simler J), approved in Haworth (HC) (n 35) [114].
[41] Rowe (CA) (n 11) [168]. His Lordship at [164] distinguished Kopecký (n 38), on the basis that the applicant never had a proprietary claim over the previously confiscated coins. Although McCombe LJ disagreed with Simler J’s approach, Sir Ross Cranston in Haworth (HC) (n 35) at [114] expressed the view that the Court of Appeal in Rowe (CA) (n 11) ‘reached no firm conclusion’ as to whether A1P1 was violated. Therefore, it is unclear which precedent is to be followed.
[42] The importance of proceeding to this stage is evident from the fact that courts have agreed to assess the measure’s lawfulness and proportionality despite finding that there were no ‘possessions’: see Haworth (HC) (n 35) [115]-[116] (Sir Ross Cranston); Rowe (CA) (n 11) [186]-[208] (McCombe LJ); Rowe (HC) (n 3) [127]-[148] (Simler J).
[43] Rowe (HC) (n 3) [131] (Simler J).
[44] Burden v the United Kingdom App no 13378/05 (ECtHR, 29 April 2008) [59].
[45] East/West Alliance Limited v Ukraine App no 19336/04 (ECtHR, 23 January 2014) [167].
[46] Centro Europa 7 S.r.1. and Di Stefano v Italy App no 38433/09 (ECtHR, 7 June 2012) (GC), [141]. More specifically, the law should be ‘sufficiently accessible, precise and foreseeable in [its] application.’: Lekić v Slovenia App no 36480/07 (ECtHR, 11 December 2018) (GC) (‘Lekić’), [95].
[47] As the Venice Commission explains more generally, ‘[l]egal certainty requires that legal rules are clear and precise, and aim at ensuring that situations and legal relationships remain foreseeable’. In that regard, a measure affecting the consequences of one’s decision in the past when such a measure was not in place does not allow one to plan for the future: European Commission for Democracy through Law (Venice Commission), Report on the Rule of Law (Study No. 512/2009, 2011) [46]. The report refers to ‘retroactivity’ as opposed to ‘retrospectivity’ but this explanation is equally applicable to the latter to the extent that it describes the unforeseeability of the consequences of our behaviour due to measures being effective before their date of enactment.
[48] This argument did not succeed in Rowe, as the Court held that a risk of future payment would be expected by taxpayers engaging in such schemes: Rowe (HC) (n 3) [129]-[130], [136] (Simler J), relying on the criteria laid out by Lord Reed in AXA (n 10) at [116]-[123]. See also Rowe (CA) (n 11) [189] (McCombe LJ).
[49] The applicants in Rowe argued the measures suffered from unpredictability. This was also rejected given that HMRC’s discretion was limited in the FA 2014 provisions: Rowe (HC) (n 3) [134]-[135] (Simler J). The existence of discretion was held not to be antithetical to the concept of foreseeability: Rowe (CA) (n 11) [188] (McCombe LJ). Interestingly, the courts failed to note that the retrospectivity of the measures renders them, per se, ‘unpredictable’.
[50] ABCD (n 34) 209; AXA (n 10) [122] (Lord Reed). This finding appears both in ECtHR and UK case law. The case of ABCD (n 34) held that the retrospective operation of a measure is, in itself, not a sufficient level of interference for the Court to find that it is unlawful. Similarly, Lord Reed in AXA (n 10) at [122] highlighted that the ECtHR has made this finding both for A1P1 (relying on Mellacher v Austria Apps no 10522/83, 11011/84 and 11070/84 (ECtHR, 19 December 1989) and Article 6 (citing Zielinski v France App no 24846/94 and 34165/96 (ECtHR, 28 October 1999). The case of AXA (n 10) itself concerned provisions in the Damages (Asbestos-related Conditions) (Scotland) Act 2009 that provided individuals having been exposed to asbestos a right of action for damages. This reversed the House of Lords decision in Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39, [2008] AC 281 that the mere presence of pleural plaques without any further symptoms or diseases did not constitute actionable injury. Insurers brought proceedings as a result of the 2009 Act and argued, amongst others, that it violated their A1P1 right in introducing a right of action retrospectively. Lord Reed at [123] held that ‘the fact that the Act may alter the continuing effects of insurance contracts entered into in the past does [not necessarily] offend against the rule of law as reflected in [A1P1]’. Rather, he held that whether there was a violation would depend on whether the measures were proportionate (which they were held to be at [134]). A similar reluctance in automatically disqualifying a measure as contravening A1P1 without considering proportionality can be observed in ECtHR case law. For instance, Pauwels (n 10) at 275 cites MA & others v Finland App no 27793/95 (ECtHR, 10 June 2003) as a case where the ECtHR does not assess the retroactivity of the measures against the criteria of lawfulness and foreseeability, but rather concludes that such ‘retroactivity’ does not violate A1P1 per se (although the word ‘retroactivity’ is used, the argument is equally applicable to ‘retrospectivity’ as it essentially refers to a measure the application of which chronologically precedes its enactment date). Pauwels argues that the reason why the ECtHR may be reluctant to conclude that such legislation violates A1P1 is because it does not allow the Court to assess whether there are any public interest reasons for them.
[51] Haworth (n 8) [58] (Lady Rose).
[52] Haworth (HC) (n 35) [116] (Sir Ross Cranston).
[53] For the rationale behind APNs, see: HMRC, ‘Tackling marketed tax avoidance: Consultation document’ (January 2014), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/275070/Tackling_marketed_tax_avoidance.pdf (‘HMRC 2014 Consultation’) accessed 8 January 2023; Rowe (CA) (n 11) [53] (Arden LJ). For the rationale behind FNs, see: HMRC, ‘Guidance: follower notices and accelerated payment notices’ (n 13), where the guidance explains that FNs target ‘followers’ of tax avoidance schemes that have been found to be ineffective and where the tax advantage has been removed.
[54] Lekić [105] (A1P1); Markovic and Others v Italy App no 1398/03 (ECtHR, 14 December 2006) (GC) (‘Markovic’), [79] (Article 6 (civil)); Guérin v France App no 25201/94 (ECtHR, 29 July 1998) (GC) (‘Guérin’), [37] (Article 6 (criminal)). Although ‘legitimacy’ is not mentioned as a requirement for the constitutional right of access to courts, the aim of the measures is considered in the exercise of statutory construction of FA 2014, ss 204-205.
[55] Gasus Dosier-und-Fördertechnik GmbH v Netherlands App no 15375/89 (ECtHR, 21 October 1992) [59].
[56] UK Parliament, ‘National Insurance Contributions Bill 2014 as brought from the House of Commons on 11th November 2014 [HL Bill 55]: Explanatory Notes’ (12 November 2014) [170] https://publications.parliament.uk/pa/bills/lbill/2014-2015/0055/en/15055en.htm accessed 8 January 2023.
[57] AXA (n 10) [126] (A1P1); Markovic (n 54) [99] (Article 6 (civil)); Guérin (n 54) [37] (Article 6 (criminal)).
[58] Philip Baker, ‘Retrospective tax legislation and the European Convention on Human Rights’ (2005) British Tax Review 1, 8.
[59] For instance, the argument that there was no deterrent effect for schemes entered into before 2014 was rejected as the broader aim was to curb marketed tax avoidance: Rowe (CA) (n 11) [192], [202] (McCombe LJ).
[60] Lon Fuller, The Morality of the Law (Yale University Press 1969), 53.
[61] Lord Reed in AXA (n 10) at [120]-[121] noted that the Convention in the civil sphere (as opposed to the criminal one) may allow for retrospective legislation where the effect of such legislation is remedial, citing Fuller (n 60). In particular, Lord Reed specifies that retrospective legislation restoring ‘the position to what it was previously understood to be’ is acceptable. On that view, it could be said that the FNs and their use of precedents essentially establish the meaning of the tax legislation in question in such a way that no loophole is created.
[62] NKM v Hungary App no 66529/11 (ECtHR, 14 May 2013) [51]. There was a similar outcome in NBS (n 10), which is noted by Pauwels (n 10) at 277.
[63] Haworth (n 8) [61] (Lady Rose). More specifically, Lady Rose held ‘would’ in Section 205(3)(b) of the FA 2014 raised the threshold for issuing an FN from ‘likelihood’ to there being ‘no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage’. Imposing a higher threshold for the requisite belief lessens the likelihood of a violation. This is valid both for the common law and the ECHR right given the duty of compatible interpretation under HRA 1998, s 3.
[64] R (UNISON) v Lord Chancellor (Equality and Human Rights Commission and another intervening) (Nos 1 and 2) [2017] UKSC 51, [2020] AC 869. Specifically, Lady Rose implemented the principle of statutory construction expounded by Lord Reed at [80] that a statute limiting the right of access to courts is to be ‘interpreted as authorising only such a degree of intrusion as is reasonably necessary to fulfil the objective of the provision in question’.
[65] Fair balance between the interests of the taxpayer and the state requires for an APN to be issued only where there are reasonable grounds for concluding that the tax would be payable: Rowe (CA) (n 11) [61] (Arden LJ). More specifically, in R (on the application of Dickinson and others) v HMRC [2017] EWHC 1705 (Admin), [2017] 4 WLR 126 at [157]-[166], Charles J held that ‘when the conditions for giving an APN…exist it can always lawfully give one’ offends good administration.
[66] R (on the application of Sword Services Ltd and others) v HMRC [2016] EWHC 1473 (Admin), [2016] 4 WLR 113 [59]-[62].
[67] Rowe (HC) (n 3) [74], [154] (Simler J). Similarly, the possibility of making representations before APNs becomes effective (pursuant to Section 222 of the FA 2014) is held to satisfy Article 6(1): Walapu (n 14) [67], [70]. Additionally, the existence of a statutory right of appeal against penalties was held to satisfy the criminal limb of Article 6(1): Rowe (HC) (n 3) [153] (Simler J).
[68] Although the existence of such an alternative does not deprive the legislative scheme of its bite, it is still one factor the ECtHR customarily takes into account in its overall assessment. This is a criterion considered in the test of proportionality in Bank Mellat v HM Treasury (No 2) [2013] UKSC 39, [2014] 1 AC 700 [20], relied on in Walapu (n 14) [121].
[69] This is even more so given that the FA 2014 as an Act of Parliament has the potential to undermine the common law rule in UNISON (n 64) on a practical level. Ideally, this would be a reason strong enough to remove the FN regime altogether.
[70] These are issuance of notices pursuant to the Disclosure of Tax Avoidance Schemes (DOTAS) regime and the General Anti-Abuse Rule, under FA 2014, s 219(4)(b)-(c).
[71] HMRC 2014 Consultation (n 53) [1.1].
[72] For instance, see NBS (n 10) [76], [80]. Additionally, the Commission’s analysis in ABCD (n 34) at [209] shows that litigant taxpayers would have to bear the burden of showing the ‘aim of the legislation could have been achieved without retrospection’.
[73] For instance, preferring McCombe LJ’s approach to A1P1 in Rowe (CA) (n 11) would allow a taxpayer to surmount the challenge posed by retrospectivity by proving ‘possessions.’
[74] Such a detailed analysis was carried out in R.Sz. v Hungary App no 41838/11 (ECtHR, 04 November 2013), which concerned a 98% tax on severance pay that the Court concluded to be in violation of A1P1 as a disproportionate measure (at [62]). The Court first laid out the general principles of proportionality, compared the Hungarian tax measure to others in Europe at [54], considered the government’s justifications for that measure at [58] and weighed the latter up against the burden cast on the taxpayer at [59]-[61].
[75] Jacobsen (n 40) 258.
[76] Rowe (CA) (n 11) [192], [203] (McCombe LJ).
[77] Rowe (HC) (n 3) [147] (Simler J).
[78] For instance, the ‘relevant judicial ruling’ could be a First-Tier Tribunal case where the taxpayer happened to lose due to a lack of representation and not on the merits: Jacobsen (n 40) 252. Similarly, the ‘main purpose test’ regarding what constitutes a ‘tax advantage’ under Section 201(2) of the FA 2014 is broad enough to encompass non-aggressive tax planning not originally targeted by the FN/APN regime: Bradley Philips, ‘Revenue Law Committee response to the “Tackling marketed tax avoidance” Consultation Document (of 24 February 2014) (The City of London Law Society, 27 February 2014) <www.citysolicitors.org.uk/storage/2014/03/20140303-Response-to-HMRC-consultation-Tackling-marketed-tax-avoidance.pdf> accessed 8 January 2023; Jacobsen (n 40) 253.
[79] See Rowe (CA) (n 11) [91]; Pauwels (n 10) 275.
[80] Registry of the European Court of Human Rights, ‘Guide on Article 1 of Protocol No. 1 to the European Convention on Human Rights: Protection of Property’ (Council of Europe/European Court of Human Rights 2022) [143] <www.echr.coe.int/Documents/Guide_Art_1_Protocol_1_ENG.pdf> accessed 28 January 2023.
[81] See for example: United Policy Holders Group v Attorney General of Trinidad and Tobago [2016] UKPC 17, [2016] 1 WLR 3383 [74].
[82] Philip Sales, ‘Proportionality review in appellate courts: a wrong turning?’ (ALBA Annual Lecture, November 2020) <www.supremecourt.uk/docs/speech-181120.pdf> accessed 8 January 2023. As His Lordship pointed out, this is in line with Rule 52.21 of the Civil Procedure Rules of England and Wales, which provides that an appeal court will allow an appeal where the decision of the lower court was wrong or unjust because of a serious procedural or other irregularity in the proceedings in the lower court. Lord Sales points out that this was confirmed by Lord Kerr in DB v Chief Constable of the Police Service of Northern Ireland [2017] UKSC 7, [2017] NI 301 and notes that ‘an appeal court is unlikely to add to the accuracy of fact determination by the trial judge’.
[83] ibid, relying on Cavendish Square v Makdessi [2015] UKSC 67, [2016] AC 1172 as an example of a case where the Supreme Court incorporated the test of proportionality into the test for the validity of a penalty clause in a contract. For an application of the test of proportionality in the Equality Act 2010, see R (on the application of Z and another) v Hackney LBC and another [2020] UKSC 40, [2020] 1 WLR 4327.
[84] Alison Young, Parliamentary Sovereignty and the Human Rights Act (Hart Publishing 2009) 107-108.
[85] Michael Blackwell, ‘Unreasonably Limiting Recourse to the Courts? R (on the application of Haworth) v HMRC’ (2022) 0(0) Modern Law Review 1, 8.
[86] ibid 9.
[87] UNISON (n 64) [85] (Lord Reed).
[88] Daniel N Hoffman, ‘What Makes a Right Fundamental’ (1987) 49(4) The Review of Politics, 527. This accords with the idea that the ECHR is ‘also an international convention designed to protect taxpayers’: Clement Endresen, ‘Taxation and the European Convention for the Protection of Human Rights: Substantive Issues’ (2017) 45(8-9) Intertax 508, 515, citing Philip Baker, ‘Double Taxation Conventions and Human Rights’ in Double Taxation Conventions loose-leaf (Sweet & Maxwell 2001), 2016.
Ilsu Erdem Ari
BA (Hons) Law (Cambridge) ‘21, LLM (LSE) ‘22, BVS (City Law School) ‘23 and Notes Editor of the LSE Law Review Summer ‘22