HC Deb 15 July 1987 vol 119 cc1178-87
Mr. Blair

I beg to move amendment No. 66, in page 32, line I, leave out sub-section (2) and add— 'This section has effect with respect to years of assessment beginning on or after 6th April 1987'. Clause 62 has fairly limited application and may seem to be a little esoteric, but it contains an important principle that the Committee ought to examine. I should be obliged if the Minister would confirm that clause 62 arises out of a court decision by the Commissioners of Inland Revenue against Padmore. It concerned a double taxation agreement between the United Kingdom and Jersey. It was held that, contrary to what had been supposed, the United Kingdom resident partner of a Jersey resident partnership was exempt from United Kingdom tax under the double taxation treaties. That was not supposed to be the effect of the legislation. Therefore, clause 62 is before us and reverses the decision in Padmore. It ensures that the United Kingdom resident partner of a Jersey resident partnership is no longer exempt.

We agreed that that loophole should be closed. However, the issue of principle to which clause 62 gives rise is that of retrospective legislation. Before clause 62 is passed, it is important that we should have firm assurances from the Minister and the Treasury about it.

Parliament should oppose retrospective legislation, for a number of reasons. The principal democratic reason is that people are perfectly entitled to do whatever the law permits them to do and that it is wrong afterwards to make it unlawful. The effect of the Padmore case was not intended by the Inland Revenue and the legislature. If people are able to do something that the Government do not wish them to do, it is their democratic right to go to law to have their rights properly assessed. If the courts find in their favour, as a matter of principle it is wrong that they should be deprived of the benefit of that decision. To introduce legislation to tighten up the future position is understandable, but it would not be understandable if the effect of a court decision were rendered nugatory. But that is what is happening.

It is important to consider the relationship between Parliament and the courts. Of course, Parliament is supreme and can do whatever it wishes, but the basic principle upon which people operate in our society is that they are entitled to take legislation at its face value, as determined by a court, for the time being. This clause would mean that those who have been doing that which they are perfectly entitled to do, as a court has found, will now have illegality visited upon them as a result of retrospective legislation.

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Mr. Tim Smith (Beaconsfield)

I have been following the hon. Gentleman's argument closely. I think that he said a moment ago that clause 62 would render nugatory the decision of that court case. However, is it not true, when considering subsection (2), that that decision would stand so far as any particular taxpayer was concerned, and that in effect there would be two classes of taxpayer—those whose cases have been determined and those whose cases were outstanding, where an appeal was pending? There would also be those who might otherwise have been able to take advantage of the change. Is not that unfair?

Mr. Blair

The hon. Gentleman's point is absolutely correct. When I said that the effect of the decision would be rendered nugatory, I should have said more precisely that that would be the effect as it applied to anyone other than the litigants. The curiosity about clause 62 is that subsection (2) appears to leave out of the retrospection those people who are engaged in litigation, but includes everybody else. That is a most peculiar provision to enact. As the hon. Gentleman pointed out, it would mean two different classes of people, those who happen to have been before the court to argue their cases, and those who have not.

It would require something persuasive from the Financial Secretary to convince my hon. Friends and me to pass legislation that seems shot through with anomalies and offends a basic principle of our constitution.

Mr. Norman Lamont

The hon. Member for Sedgefield (Mr. Blair) is absolutely right to identify this as an important clause that we should consider. I assure the Committee that, even if no other hon. Member had risen on this point, I should have got to my feet to make the meaning of the clause absolutely plain to the Committee because it has caused me considerable concern and we have not come to the decision that we have without much careful consideration.

As the hon. Member for Sedgefield said, the purpose of clause 62 is to restore the general understanding of the law to what it was before a decision of the High Court last December in a case involving foreign partnerships. That case was Padmore v. the Commissioners of the Inland Revenue. Briefly, the facts of that case are that the High Court ruled that a United Kingdom resident partner in a foreign partnership was not liable to United Kingdom taxation on his share of the profits of the partnership because of the interaction of the Jersey double taxation agreement with United Kingdom domestic law. However, similar decisions might well have been made in the case of several of our double taxation agreements.

I have said that the purpose of the clause is to restore the general understanding of the law. One crucial point, which the hon. Member for Sedgefield made fairly and rightly, is that what the Inland Revenue understands to be the law is not necessarily what is widely accepted to be the law. Obviously, that consideration has weighed in my mind. I am aware that some people questioned the general understanding of the law before that case. However, I believe that the phrase that I have used is, none the less, a fair statement of the position. Butterworth, for example, described it as the widely accepted view, and the journal Taxation described the decision as surprising.

The Revenue tells me that few taxpayers claimed exemption before that court decision. It is estimated that more than 15,000 foreign partners could have claimed exemption, whereas to the best of the Revenue's knowledge, only three partnerships have done so. I stress that the double taxation agreement has been in existence since 1952. Therefore, during that period a large number of an admittedly restricted class of person—partners in foreign partnerships—have accepted the position and paid tax accordingly.

The Government have come to the conclusion that the law should be restored to what it was accepted to be before the High Court decision. As the professional press has pointed out, leaving the clause unamended would lead to loopholes that would be much exploited. However, I appreciate that that is not the Committee's main concern. I appreciate also how sensitive a matter retrospection is. I assure the Committee that we did not propose lightly retrospection in this instance. We touched on this matter in the debates on last year's Finance Bill. The type of retrospection on which the House has normally looked with disfavour is where the law is changed retrospectively so that people find themselves faced with unexpected and unprovided for tax liabiliies for past years. In this instance, retrospection is somewhat different.

As the law now stands, after the High Court decision, a partner in a foreign partnership who has paid tax on the partnership profits in the normal way could obtain an entirely unexpected benefit in the form of recovery of tax for the previous six years. Thereafter, the purpose of retrospection in this clause is to prevent taxpayers from obtaining such a windfall tax advantage. It is not to inflict an unexpected tax charge on the unwary. I am sure that the House will want to think about the distinction that I have drawn between the different types of retrospection.

I have absolutely no wish to misrepresent the hon. Member for Sedgefield. However, last year in the debate on section 49 of the Finance Bill he drew that very distinction when he referred to the possibility of companies being able to take advantage retrospectively of the decision in the case of Collard v. Mining Industrial Holdings Ltd. as unsatisfactory. As I had just appeared as Financial Secretary, I can recall that the hon. Gentleman drew that distinction. It caused me a little difficulty at the time.

However, in proposing retrospective action in this case, the Government felt that with £100 million at stake over the six-year period during which claims could have been made we must therefore look to the interests of the general body of taxpayers on whom this expenditure would fall, rather than to a special class of taxpayers, to most of whom this tax refund would come as a complete surprise.

The Government are not suggesting that this should be a precedent for all time, but it seemed right in this case. Indeed, I should point out that there are such precedents. In 1971, the Government introduced legislation to claw back tax relief following an increase in family allowances. That happened after a court decision exactly the same circumstance as here. In 1976, there was a provision involving the effect of advance corporation tax on preference dividends. In both cases—the purpose of the legislation was to reverse the consequences of a High Court decision and in both cases, that took the form of deeming the change in the law always to have had effect for the reasons that I have given.

The Government are proposing, not to overturn the decision of the High Court in the case of the particular taxpayer involved, but to protect the taxpayer involved from the legislation. If the case goes to a higher court, the proposed legislation would enable the case to be decided there on the basis of the law as it was before the legislation. That is why the legislation is framed as it is. Our altering the law will not affect the outcome of the case and the case will still be determined by the courts.

Mr. Blair

I want to make sure that I have understood that. I find subsection (2) a little difficult to understand. Once the clause is passed into law I cannot see how the appellate court can find in favour of the taxpayer unless that taxpayer is put in a unique category and is uniquely entitled to this unexpected tax relief.

Mr. Lamont

I assure the hon. Gentleman that the legislation has been drafted precisely as I have described so that it will still be possible for the court to decide on the basis of the law as it was before this legislation. Perhaps if I can pinpoint the precise words for the hon. Gentleman later, I shall do so.

My hon. Friend the Member for Beaconsfield (Mr. Smith) said that we were making two classes of taxpayer and that the law was being applied differentially. That has been our choice. We do not wish to deprive the individual taxpayer who has taken this matter to the courts of the benefit of going to the courts. He has challenged the view. We believe that it is widely accepted that this is a technical deficiency in the law which will give an uncovenanted benefit at considerable cost to the public purse to a category of people who were not expecting it. We think it would be wrong to deprive the person who has taken the matter to the court of the consequences of the court's decision if he is successful. I cannot deny that that throws up the dilemma that my hon. Friend has described, but we decided that that was the price to pay for accommodating the taxpayer involved.

The legislation is retrospective, and no one likes retrospective legislation. I have tried to explain why the position has arisen, how it has arisen in other circumstances previously and how we must balance several sets of factors in this case. We believe that it is right that £100 million of tax should not be repaid to a small number of taxpayers to whom the court decision would have come as a surprise. In this case we feel we must consult the interests of the general body of taxpayers who would otherwise have to foot the bill for such a windfall.

This is in no sense a precedent for introducing in future legislation which is usually thought of as retrospective legislation, that is legislation involving people suddenly facing unexpected tax demands for past years. This legislation falls firmly in that category. In general the United Kingdom tax system seeks to tax all income arising in the United Kingdom, no matter to whom it belongs, and all income arising outside the United Kingdom belonging to persons resident in the United Kingdom. It follows that someone resident in the United Kingdom is normally taxable on all his income, no matter where it arises—that is, he will be taxable on his worldwide income. There is no good reason why a United Kingdom resident who is a member of a Jersey partnership or an overseas partnership should enjoy some special advantage over his fellow United Kingdom taxpayers by being excluded from the general scope of United Kingdom taxation.

Mr. Tim Smith

My right hon. Friend may well be right about the substance of the clause, but the question of retrospection is exercising the Committee.

I understand the distinction that my right hon. Friend sought to make. I have various diktats on retrospection and they were designed for the artificial tax avoidance schemes that were common in the mid and late 1970s. It was always said that some warning must be given to taxpayers and that the earliest date at which legislation could be retrospective was the date of announcement of a change in the law by the Inland Revenue or the Government.

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In 1958 Mr. Heathcoat-Amory, the then Chancellor of the Exchequer, said: In my opinion, one essential pre-requisite, if retrospective legislation is to be used, is that those concerned should have every reason to be aware of the taxation consequencues of their specific actions and, therefore, have a chance of avoiding it if they wish."—[Official Report, 18 June 1958; Vol. 589, c. 1132.] My right hon. Friend said that previously there was no doubt about the law. The Inland Revenue press release published on 17 March refers to the general understanding of the law and implies that there was not any uncertainty. But there must have been sufficient uncertainty for a taxpayer to challenge it and to think that there was a reasonable chance of persuading the commissioners that he had a case. There must have been that amount of uncertainty. Therefore, there was a degree of uncertainty, although the Revenue's description of the previous law was that there was a general understanding about it.

A constituent of mine, Mr. I. D. Barnett, who, I am sure, has no personal axe to grind, wrote to me in a personal capacity, although I know he is a tax advisor to one of our major industrial companies. This whole question turns on whether there was a general understanding of the law. My constituent writes that the statement in the press release is a considerable overstatement, to put it at best. It may have been the Revenue's understanding but it was not so generally accepted. We know this because much tax advice was given on the basis that was later established by the case itself to be correct: but there were other cases besides Padmore which had been left pending its outcome. Even if the Revenue were correct, would it justify making the proposed change? It would not, in my view. Clearly, my constituent is not in any doubt about the matter.

My right hon. Friend the Financial Secretary quoted from a couple of learned journals on the subject. I do not know the answer to this question or the extent to which there was a general understanding of the law. My constituent tells me that it was not merely being challenged by Mr. Padmore, but by other taxpayers who were perhaps awaiting the outcome of the Padmore case. Therefore, we are in real difficulty here.

Perhaps it would be wrong to ask my right hon. Friend how much tax is at stake. It may be a substantial sum and perhaps we should know how much it is. An important principle is at stake and it is important that we understand what we will do if we agree to the clause.

Mr. Blair

First, I congratulate the Financial Secretary's researcher who dug out my speech last year when I was justifying an opposite proposition. That only shows that one should not serve on too many Finance Bills.

I understand the right hon. Gentleman's point. To summarise it, no principle is immutable. That should appeal to politicians. if large sums are at stake—the Financial Secretary gave the figure of f100 million—we may look more favourably on retrospection than we would otherwise. I have some sympathy with that. But I need to be persuaded on some points. I must be sure that I understood the Financial Secretary correctly when he said that potentially 15,000 people could claim this exemption. In other words, if this legislation was not retrospective, there would be a potential of 15,000 foreign partners who could claim the exemption backdated to 1952. That would obviously he very serious. The Minister said that only three people had attempted to claim the exemption. That does not seem to correspond with the information of the hon. Member for Beaconsfield (Mr. Smith), although if it is so it strengthens his hand.

There are still two difficulties outstanding. First, it is not at all clear to me that this was a universal understanding of the law. In a sense, that was shown by the fact that the case was taken to the court. Secondly, I am still troubled by the meaning of subsection (2) and I am not at all sure that it will have the effect that the Minister intends it to have. Presumably, he wishes to leave Mr. Padmore as the unique beneficiary of the tax exemption and so that he will claim exemptions where others cannot. I find that method of proceeding a little difficult to understand. Presumably, once this case got off the ground there were people hanging fire and waiting to see what happened. What will be the test? Do those people have to have initiated proceedings or consulted lawyers? Are not all the others to be rewarded in a similar way?

I am not sure that subsection (2) simply restricts the benefits of this tax exemption to Mr. Padmore. It says: Nothing in subsection (1) above affects …

  1. (a) the determination of any Commissioners or the. judgment of any court made …, or
  2. (b) the law to be applied in proceedings on appeal to the. Court of Appeal."
Without greater definition that leaves things in a complex mess. The decisions of the High Court are precedents and when appeal proceedings are taken and the appeal court gives its rulings, those are precedents too. They are not decisions that affect individual cases alone. The Minister should ask his advisers again whether subsection (2) would limit the decision to Mr. Padmore. It would be strange if the clause left one taxpayer in a unique position. I do not know whether that has ever been done before or whether a taxpayer, through foresight, courage or luck has taken the Revenue to court and won, thus being left as the sole beneficiary of the loophole that he has discovered. If that has not happened, I am unhappy about the provision. The Minister should look at it again.

I have put the point about the principle of retrospection and I shall be obliged if the Minister will deal with it. If he is sufficiently persuasive, I am prepared to revert to my position of last year, but with regard to subsection (2), it seems that there are serious problems which have not been given the fullest consideration.

Mr. John Townend (Bridlington)

I appreciate the Government's predicament. There are two questions of principle here. The first is retrospection, and I think that most people with Conservative principles abhor retrospective legislation. The other important point of principle was raised by my hon. Friend the Member for Beaconsfield (Mr. Smith) and by the hon. Member for Sedgefield (Mr. Blair). It is that taxpayers expect equality before the law. It has been suggested that we are to have two classes of taxpayer—Mr. Padmore and the rest—although from my reading of the clause its effects will be rather wider. However, this provision constitutes an important breach of a principle which is also breached in a later clause. Is this the first occasion on which the principle that all taxpayers have equal rights before the law has been breached, or are there precedents? Like my hon. Friend and the hon. Member for Sedgefield I am unhappy about this, although I can well appreciate why the Government do not want 15,000 people to be able to claim all the tax that they have paid over a period of six years. Most of us agree that it is not right that people who are not resident in this country should not contribute to it in the form of taxes. While I appreciate the Government's problem, important issues of principle are involved, which have not been satisfactorily answered.

Mr. Michael Grylls (Surrey, North-West)

The Government should think more deeply about this. In essence, the Revenue is adopting the new tactic of saying, "Heads we win in the courts and tails you lose in the Finance Bill" in order to enforce its private and unpublicised view of the law. That is like moving the goal posts when the ball has been kicked through them and the referee has signalled a goal, and we should not be doing that sort of thing. It seems to go against the generally understood view of fair taxation, and against constitutional propriety and natural justice.

The taxpayers' charter, issued by the Revenue in July 1986 talked about fairness and retrospection and, on fairness, it said: You will have your liability decided impartially and be required to pay only the amount of tax properly due according to the law; you will be treated in the same way as other taxpayers in similar circumstances. That is not happening with regard to Mr. Padmore.

The normal presumption against restrospection has been breached in the past only in the taxpayer's favour—which, if fair enough—or to correct undisputed errors and omissions in drafting, and most people would understand that.

If the business world is to plan its affairs and its investments, it is crucial that it should know where it stands—subject, of course, only to the future decisions of the courts—when it enters into a transaction or a business decision. The business world is put in a very difficult position and cannot organise its affairs if it does not know where it stands.

I ask my right hon. Friend to bear in mind the points that I have made, because we should think carefully about this matter.

Mr. Tim Smith

My question is supplementary to the question asked by the hon. Member for Sedgefield (Mr. Blair) about subsection (2). The hon. Gentleman asked whether there were precedents.

Clauses 71 and 80 also have retrospective effects and clause 80(2) contains a similar provision to clause 62(2)(a) but it does not include a reference to proceedings on appeal. It simply states: Nothing in subsection (1) above affects the determination of any Commissioners or the judgment of any court made or given before 14 May 1987". It does not then refer to the law to be applied on appeal. Is that because the Inland Revenue does not intend to appeal? Why is there different treatment in each of the three different clauses?

Mr. Norman Lamont

I hope that the Committee realise that I have not reached my conclusion easily or that I do not share the very considerable concern about this extremely serious matter. I have tried to outline the precedents. Sometimes, Governments, whether Conservative or Labour Governments have concluded that a court case has produced a result that has gone against the widely accepted view—not just the Inland Revenue view—of the law and have decided to reverse it, precisely as we propose to reverse it on this occasion.

The Government have exempted the person who took the matter to court. My hon. Friend the Member for Beaconsfield (Mr. Smith) and the hon. Member for Sedgefield (Mr. Blair) have asked whether there is a precedent for exempting a person who takes such a matter to court and the answer is, unambiguously, yes. That happened with the cases in 1971 and 1976.

My hon. Friend the Member for Bridlington (Mr. Townend) is correct in saying that that leaves us in the uncomfortable position that the law is being applied specially for one person. We have taken that action with our eyes open and for one specific purpose. It is not our intention to negate the role of the courts or in any way to frustrate the right of the taxpayer to take something to court. We certainly do not want to be in the position, as described by my hon. Friend the Member for Bridlington, of simply overturning the decisions of the courts because it meets the convenience of the Inland Revenue.

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We have had other instances when large sums of money have been at stake. This matter centres on two elements of judgment. First, was it "widely accepted" by people outside the Inland Revenue that the law was as it was thought to be? Secondly there is a judgment to be made on the sorts of sums of money that were at stake. With regard to the two previous cases I do not believe that there is any doubt that substantial sums of money were likely to come as a windfall benefit to many taxpayers who had not expected that.

I anticipate that people will ask whether £100 million is a large sum of money. They will ask the significance of £100 million in relation to 15,000 partners of a Jersey firm. In one sense that sum is not large, but when concentrated on a limited class of people it is. It would be unrealistic and dishonest to pretend that the sum of money involved was not part of the consideration and subsequent judgment.

Mr. Grylls

Is it not the case that others besides Mr. Padmore have already won their cases in front of the Special Commissioners? Therefore, in a sense the decision of Padmore was not a freak one. However, others are to be denied the relief that will be allowed to Mr. Padmore.

Mr. Lamont

My hon. Friend is not correct and it would be extremely serious if that were the case.

My hon. Friend the Member for Beaconsfield said that he thought that there had been a number of cases that had been left open. However, I am aware of only three cases where the matter has not been resolved.

I have never said that the view of the law was unanimous—indeed, unanimity hardly ever exists. However, do we have an instance where the view of the law was or was not widely accepted? I have listened with great care to what has been said and I will read the report of those speeches to see whether there is anything to challenge the conclusion that I have reached. I know of three cases. I quoted what various authorities have said. Those views do not close the matter nor end the argument. However, it must be significant that people with such a knowledge of the law took the same view and appeared to believe that the decision that we have reached is not entirely surprising.

Mr. Blair

If there are another three cases in train will they be treated in the same way as Mr. Padmore?

Mr. Lamont

No, they will not. The people concerned have not taken the matter to court. The other partners of Mr. Padmore will obviously benefit if the case is successful, but others who have not taken the matter to court will not benefit.

Mr. John Townend

Does my right hon. Friend agree that if the other three cases are not proceeded with while the Padmore case is resolved—the decision on that case given as the reason for not proceeding with the others—it is unfair that they should not be included in subsection (2) with Padmore?

Mr. Lamont

My hon. Friend is right and I am sorry if I misled the Committee. They will be treated in the same way as Padmore.

The hon. Member for Sedgefield has made some good and telling points—he always does in Committee—but I do not think it is relevant in this debate to say that, because someone takes something to court that means that the view of the law is not widely accepted. I am sure that, on reflection, the hon. Gentleman will consider that that is not the best argument to employ.

Even if a person does take a matter to court and even if there are two or three other people waiting to take the matter to court I believe that it is still possible, in a matter of this kind when substantial sums of money are at stake and when the law is "widely accepted," to come to the conclusion that the Government must reach their decision on the same basis as previous Governments.

Mr. Alex Salmond (Banff and Buchan)

If the Government had not thought that the case before the commissioners had brought forward a surprising result and that the law had not been "widely accepted" would they have proceeded in this way? I do not know what was "widely held" as regards this section of the Bill, but if the Government adopt the same argument with regard to clause 80 they will be in a substantial amount of trouble.

Mr. Lamont

I do not want to comment on clause 80. We shall have a separate debate on clause 80. Each of the cases should be considered on its merits.

I have done my best to explain to the Committee that the different factors must be balanced in this instance. I reached my conclusion with extreme reluctance. I think that the officials of the Inland Revenue would confirm that I did not believe that this matter was a bunch of roses. I do not like doing this, but I am convinced that, balancing everything, the conclusion I have reached is inevitable. I believe that it is comforting that there are precedents for the Government's decision. Nevertheless we should consider the matter carefully. I am firmly against retrospective legislation, but in this instance I believe there are compelling arguments in favour.

Mr. Blair

I believe that the right hon. Gentleman has put as good a case as possible in defence of the retrospection within this clause. I echo the words of my hon. Friend the Member for Banff and Buchan (Mr. Salmond) that those arguments may not apply to later clauses.

In essence, what the right hon. Gentleman has said is fair. It would be an extremely expensive demonstration of principle if we decided that £100 million could be sniffed at. I am not prepared to take that liberty. However, I can think of many ways in which I would prefer to spend £100 million than on foreign Jersey partnerships. My hon. Friends would be appalled if I took a different view. I believe that it was right for us to raise the question of retrospection. It is always right to do so in case we become lax about things over which we should be strict.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 62 ordered to stand part of the Bill.

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