Rob Barber: Retrospective legislation is an offence to justice and an enemy to growth

Rob Barber is a Management Consultant and former Chiltern District Councillor

The more things change, the more they stay the same. A quote often wrongly attributed to Cicero has the great statesman and constitutionalist opining that: “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, and the arrogance of officialdom tempered and controlled.”

One does not have to be a Roman philosopher to appreciate that – at a time when the UK still spends £99.5 billion a year more than it brings in, and with a public debt of £1,000 billion – it is essential for the Government to make the business climate as attractive as possible. To grow the tax base and maintain living standards in a competitive global economy, the Government must encourage entrepreneurship and remove barriers to investment and job creation.

A key platform of the Government’s deficit reduction strategy has been to take a strong stance against tax avoidance. It is understandable that with tough spending choices needing to be made, the Treasury wishes to ensure everyone is paying their fair share and close down avoidance loopholes and maximise revenue. But some of the rhetoric around tax avoidance has led to bad policy decisions. Whether it has been the Exchequer Secretary declaring cash payments to tradesmen morally wrong, or the Prime Minister opining on the tax affairs of a well known comedian, this year has seen tax avoiders overtake bankers and benefit cheats as the public enemy to be thrown to the lions.

The Government’s flagship policy on tax avoidance is the introduction of a General Anti-Avoidance Rule (GAAR), through this year’s Finance Bill. The purpose of the GAAR is to deter tax avoidance activity, while creating stability and certainty within the tax regime, and reducing costs to smaller companies and consultants by providing clarity about what kind of tax arrangements are acceptable.

Unfortunately, the details of the GAAR, published at the end of March, may have the opposite effect by making an overly convoluted tax system worse. The Institute of Chartered Accountants in England and Wales has warned that the GAAR will cause greater confusion about the difference between tax avoidance and acceptable tax planning. This may tie up the tax courts for years at great cost to individuals and businesses, without meeting the public expectation test that large companies will be forced to pay higher tax bills.

That the complexity of Britain’s tax code – which has doubled in size since 1997 and now runs to almost 18,000 pages – discourages small business activity, entrepreneurs and innovators is not in question. What is equally troubling is the way in which this complexity has resulted not only in lost or discouraged business activity, but in real hardship and injustice to those who fall between the cracks of legitimate tax planning, and the way in which successive governments have ridden roughshod over accepted standards of fairness and the rule of law to plug gaps in revenue.

In 2000, the then Government introduced IR35 to combat what it saw as “disguised employment” by freelancers, contractors and consultants. However, IR35 resulted in far higher tax demands being placed on consultants who fell within its scope – more than would have been the case had they been in regular employment. It also created great uncertainty about when the provisions would apply, leaving contractors fearing future demands and being pursued for unexpected liabilities. IR35 is now recognised as bad legislation, and the Government has pledged to review it – although this has not taken place and the term “disguised employment” has simply been redefined. leaving contractors in exactly the same position of uncertainty.

To obtain greater certainty about their tax affairs, many consultants instead used a tax planning product that was widely marketed by tax consultancies and promoters, and which utilised double taxation agreements and trading trusts to create greater certainty. It also had the added effect of substantially reducing tax liabilities, and hence could be considered tax avoidance and a tax loophole. Nonetheless, these arrangements had been debated by Parliament as far back as in 1987, had been reviewed by HMRC and were included in their tax manual. HMRC accepted money claims under the arrangements, encouraging its dissemination and creating legitimate expectation that the practice was tolerated. Between 2000 and 2008, several thousand IT consultants, contractors and freelancers entered into the arrangements to gain more certainty about their tax position.

In 2008, the Government noted growing numbers of people using these arrangements and gaining a financial benefit, so  itsought to shut them down. In doing so they passed the notorious Section 58 of the Finance Act 2008. Against all accepted practice, and completely unannounced, this closed down the arrangements but also applied the changes retrospectively. As a result, thousands of contractors are being hit with huge demands for PAYE and National Insurance back tax running into hundreds of thousands of pounds, plus interest. A survey by the No To Retro Tax group, which campaigns against the use of retrospective legislation, has indicated that of those affected, 47% will have to sell their homes and 30% will be bankrupted by these backdated demands.

Today, there is a growing campaign for justice for those affected by Section 58, with 18 Conservative, Labour, Liberal Democrats, Greens and Democrat Unionist MPs supporting a letter calling for the Chancellor of the Exchequer to repeal the retrospective element of the legislation and Conservative MP Mark Field calling for justice for victims during Second Reading of the Finance Bill.

The temptation to introduce punitive tax changes against whichever group is the enemy of the month can be high - particularly when it affords the opportunity to plug the gap from disappointing growth figures. Such short term raids rarely work as expected. According to answers to a Parliamentary Question, IR35 brought in only 1% of the revenue it was supposed to collect. HMRC believe that a retrospective raid on freelancers and contractors through Section 58 will net them £200 million. The reality is that with a large proportion facing bankruptcy, they will be lucky to gain a fraction of this amount.

If the Government wishes to reduce tax avoidance, it should lower the tax burden and write better and clearer legislation, rather than allowing a practice to be tolerated for almost twenty years before shutting it down retrospectively. If Ministers wish to return to growth, ensure prosperity in challenging times, and prevent Britain’s position in the world economy from being undermined, they should reject quick fixes such as retrospective legislation and instead provide a stable environment which makes it easier and simpler for people to plan their tax affairs.