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OUTER HOUSE, COURT OF SESSION
P796/20
OPINION OF LORD TYRE
In the petition of
NIALL ADRIAN FINUCANE
Petitioner
for
Judicial Review of the lawfulness of the charges imposed by Her Majesty's Commissioners
for Revenue and Customs under reference to schedule 11 and schedule 12 to the
Finance (No 2) Act 2017
Petitioner: O'Neill QC, Welsh: Balfour & Manson LLP
Respondents (HM Revenue & Customs): Simpson QC, MacIver: Office of the Advocate General
for Scotland
14 April 2021
Introduction
[1]
The petitioner is an airline pilot. He is a citizen of Ireland and Switzerland.
Between 2001 and 2014 he worked for Ryanair and was based at Prestwick. His contractual
arrangements were operated on behalf of Ryanair by an English-registered company called
Brookfield Aviation International Limited ("Brookfield").
[2]
The petitioner states that in 2008 he was informed that he would henceforth be
treated as providing his services to Ryanair not as an employee but as a self-employed
individual. He believes that this was done to bring advantage to Ryanair by removing him
2
from the statutory protections afforded to employees. He was given no choice in the matter.
He took legal advice and tax advice as to how best to deal with his new enforced
self-employed status. In particular, he sought tax advice from AM Limited ("AML"), a
company based in the Isle of Man. He was advised to enter into a "loan scheme", which he
did. As explained more fully below, this arrangement provided for payments by Brookfield
for the petitioner's work for Ryanair to be made initially to AML and later (following a
change in tax law) to another Isle of Man entity (the AML Partners Collective Company).
Those entities paid small amounts by way of salary (or, later, payment for services) to the
petitioner and also advanced loans to him which amounted to the bulk of the payments
received from Brookfield. Income tax was paid by the petitioner in the United Kingdom on
the salary/services payments but not on the loans.
[3]
The respondents ("HMRC") have for many years regarded loan schemes of this kind
as a form of tax avoidance. The effectiveness of such schemes for avoiding tax on the
amounts of the loans has been challenged in court proceedings and, since 2011, by a series of
statutory enactments intended to nullify any tax advantage that might be obtained were the
schemes to be held to be otherwise effective. As a consequence, the use of loan schemes has
declined, but by 2016 significant amounts of loans remained outstanding and untaxed. In
order to recover tax on those amounts, the Finance (No 2) Act 2017 introduced a charge,
known as the loan charge, to be levied on the amounts of any loans outstanding as at 5 April
2019.
[4]
In these proceedings, the petitioner seeks declarator that the loan charge imposed
in 2017 is unlawful and in any event unable to be applied against him because (a) it
constitutes an unjustified infringement of and interference in the fundamental EU law
principle of free movement of capital: and (b) it is incompatible with the EU law
3
prohibitions against the retrospective imposition of penalties and, separately, the imposition
of penalties which are disproportionately severe.
[5]
The application came before me for a substantive hearing. At a previous permission
hearing I had granted permission for the application to proceed out of time. Affidavits were
lodged by the petitioner and by another former Ryanair pilot and, on behalf of HMRC, by
Ms Jacqueline McGeehan, HMRC Deputy Director with responsibility for income tax policy,
and Mr Steven McFarlane, an HMRC officer with responsibility for dealing with loan
schemes operated by AML.
[6]
The petitioner founds upon various rights under EU law. In relation to the United
Kingdom's withdrawal from the EU, the following were not in dispute:
Any EU law rights which were recognised and available before withdrawal
continue to be recognised and available thereafter (European Union
(Withdrawal) Act 2018, section 4):
The principle of supremacy of EU law continues to apply to any enactment
passed before the completion date (ibid, section 5(2)):
The Charter of Fundamental Rights ("CFR") is no longer part of domestic law
(ibid, section 5(4)), but can still be relied upon in these proceedings because
they were commenced but not finally decided before the completion date (ibid,
schedule 8, paragraph 39(3)):
A general principle of EU law (such as, in the context of these proceedings, the
principle of fiscal legality) is part of domestic law on or after the completion
date only if it was recognised as a general principle of EU law by the European
Court in a case decided before the completion date (whether or not as an
essential part of the decision in the case) (ibid, schedule 1, paragraph 2):
4
Any question as to the meaning or effect of any retained EU law is to be
decided, so far as that law is unmodified on or after the completion date in
accordance with retained case law and retained general principles of EU law
(ibid, section 6(3)).
Loan schemes: a brief description
[7]
In her affidavit, Ms McGeehan described loan schemes (or, as she termed them,
"disguised remuneration schemes") as follows. Beneficiaries of loan schemes provide their
labour and expect reward in return. A significant part of the expected reward is paid as a
loan or advance to the individual, frequently from a third-party vehicle such as a trust. This
loan is claimed not to be taxable as income in the way that the earnings of an employee or
profits of a self-employed person would be. The individual is free to spend the money in the
same way as any other income and will rarely make any provision for repayment of the
loan. Such schemes were first used by large employers in the 1990s to deliver what was
purported to be tax-free pay and bonuses to their employees. Later, smaller employers used
them to reward directors and employees. The schemes typically diverted money through
structures such as employee benefit trusts and employer funded retirement benefit schemes.
There were also similar arrangements based on trading, where the contractor was a
self-employed sole trader or in a partnership. These arrangements reduced the income of
the trade by diverting monies or claiming a deduction from the business profits, with the
amounts deducted being paid over to what was known as a "self-employed remuneration
trust". The trust would then make a loan to the individual trader which was not expected to
be repaid. Ms McGeehan's description of a loan scheme based on trading is consistent with
5
the petitioner's account of the arrangements into which he entered for the tax years 2011-12
to 2014-15:
"In 2011, the petitioner became a member of the AML Partners Collective Company
(`PCC'). As a partner of PCC, the petitioner became a beneficiary of the Partners
Benefit Trust. As such, he was able to benefit from the trust fund. Knox House
Trustees Limited is a company registered on the Isle of Man. Knox House Trustees
Limited acted as trustee of the PCC Partners Benefit Trust. Knox House Trustees
Limited was accordingly the lender for the purposes of loans made from the scheme
to the petitioner."
[8]
In HMRC's view, loan schemes were not effective to avoid income tax on the
amounts advanced to the employee or trader. That view, however, was not initially shared
that loans from employee benefit trusts were not chargeable to income tax. It was not
until 2017 that the Supreme Court held in RFC 2012 plc v Advocate General 2018 SC (UKSC) 1
that Dextra and Sempra Metals had been wrongly decided. In the meantime, the Government
had proceeded to secure the enactment by Parliament of targeted anti-avoidance legislation.
Statutory provisions
[9]
Needless to say, the legislation is complex. For present purposes it is sufficient to
explain the overall effect of the charging provisions. In the first of these, the Finance
Act 2011 inserted a new Part 7A into the Income Tax (Earnings and Pensions) Act 2003
("ITEPA"). These provisions imposed a charge to income tax (and national insurance
contributions) on the full value of a loan made to an employee, or to a related party, by a
third party such as a trust. Anti-forestalling rules applied the charge to transactions after
9 December 2010, when a ministerial statement announcing the new charge had been made.
Otherwise the charge was not retroactive. It was subject to various exceptions, including in
6
particular an exception for loans made on ordinary commercial terms with no connection to
a tax avoidance arrangement. There were further exceptions for, eg, self-invested pension
schemes and SAYE savings schemes. As regards loans made before 9 December 2010,
HMRC continued to challenge these under other, pre-existing statutory provisions.
[10]
The 2011 legislation was intentionally wide-ranging, and many employers stopped
using the kinds of loan schemes targeted by it. Scheme promoters, however, continued to
attempt to devise schemes that would fall outside th e scope of the 2011 provisions. These
included schemes in which the recipient of the loans was self-employed instead of
employed. Legislation to combat the use of loan schemes in the context of self-employment
was introduced by the Finance (No 2) Act 2017 by means of insertion of sections 23A to 23H
into the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA"), again without
retroactive effect.
[11]
After 2011, HMRC attempted by various means to encourage users of pre-2011 loan
schemes to settle what were perceived to be their tax liabilities. Those attempts achieved
only limited success and individual usage of loan schemes began to rise again. By 2015,
HMRC were seeking to devise a new strategy for recovering the income tax and national
insurance contributions that they perceived to be due in respect of outstanding loans
received under both pre- and post-2011 schemes. The solution that HMRC chose to adopt
was the loan charge. The stated purpose of the loan charge was, quite simply, to shut down
the use of loan schemes by requiring affected taxpayers to do one of three things, namely to
settle their perceived liabilities, to pay off the loans, or to pay the loan charge.
[12]
Legislation imposing the loan charge is in schedules 11 and 12 to the Finance (No 2)
Act 2017 (as subsequently amended). Schedule 11 applies to loans received by employees:
schedule 12 to loans received by self-employed persons. The effect of each of these sets of
7
provisions is that the amount of any loan falling within the scope of the legislation which
was outstanding as at 5 April 2019 became chargeable to tax at that time. As originally
enacted, the legislation applied to loans made at any time since 1999. One effect of bringing
all outstanding loans into charge in a single tax year was to bring some of those affected into
a higher tax bracket than would have been applicable if the loans had been charged to tax in
the years in which they were received. This was intended to encourage recipients to pay tax
(and interest) on the basis that the loans had been chargeable when received (including
paying tax for years in respect of which assessment would now be out of time). Both
schedules contained provisions excluding loans not connected with a tax avoidance
arrangement or the obtaining of a tax advantage.
[13]
The introduction of the loan charge led to an outcry among those affected by it.
Many of those were individuals who had participated in a loan scheme on the basis of
assurances by scheme promoters that it "worked" and would not be challenged by HMRC.
They had organised their financial affairs on the assumption that they would not be required
either to pay tax on the loans or to make repayment of them to the lender, and did not now
have the funds needed to pay the charge, especially as a lump sum in a single tax year. The
retrospectivity of the charge, covering a period of 20 years, and its application to sums
received during years which could not now otherwise be brought into charge to tax, were
unusual features that were perceived to be particularly unfair. In many cases there had been
little or no direct communication between HMRC and the affected individuals for a lengthy
period of time, and intimation of a liability to pay a large amount of tax came as a severe
shock.
[14]
In response to these concerns, the Government commissioned an independent
review by Sir Amyas Morse, the former Comptroller and Auditor General, of the policy and
8
implementation of the loan charge. In December 2019 the report of the Morse review was
published. It contained a list of 20 recommendations, all except one of which the
Government accepted and undertook to implement. Among the recommendations accepted
were the following:
(i)
the loan charge should not apply to loans entered into before 9 December 2010:
(ii)
in respect of loans entered into after 9 December 2010, the charge should not
apply to "unprotected years", ie years in respect of which no investigation had been
opened by HMRC, provided that the taxpayer had made reasonable disclosure to
HMRC of their use of a loan scheme (with other "unprotected years" remaining
within its scope):
(iii)
taxpayers should be allowed to spread their outstanding loan balances over a
period of 3 years, in order to mitigate the impact of stacking the liabilities in a single
tax year, thereby creating increased exposure to a higher rate of tax.
Implementation of those recommendations was effected by amendments made to
schedules 11 and 12 to the Finance (No 2) Act 2017 by the Finance Act 2020. That, in broad
outline, is how the law stood at the time of commencement of the present petition.
[15]
In the course of the hearing it was submitted on behalf of the petitioner that when
addressing the issues raised I should have regard not only to the law as it stood at the date
when the petition was commenced but also to the law as it had stood before the changes
made in implementation of the Morse recommendations. I reject that submission. The
petitioner has no standing to challenge legislative provisions that were repealed before the
time when the loan charge became payable and which cannot now affect him, or indeed
anyone else.
9
The petitioner's circumstances
[16]
The petition contains detailed averments about steps taken by the petitioner to find
a "suitable solution" to the problems created by Ryanair's decision to treat him as
self-employed. He avers inter alia that he was advised by AML that he had no alternative to
using a loan scheme if he was to continue to work for Ryanair as a now self-employed
contractor and continue paying tax in the UK; that he was not familiar with the details of
the way in which the AML loan scheme would operate; and that he relied on assurances by
AML that the loan scheme was a lawful tax efficient scheme known to and approved by
HMRC. He admits that he was paid a small salary by AML and that he received loans of
substantial amounts "on beneficial terms". He asserts that tax mitigation was not his
motivation for entering into the scheme. He avers that he has no reasonable prospect of
being able to pay the sum now sought by HMRC, and that he has been placed under
financial and emotional strain by the UK Government's attempts "to coerce him into
reaching a settlement by the threat of the imposition with retrospective effect of the penalty
that is the loan charge".
[17]
I have no reason to doubt the petitioner's averments in relation to what he was told
by AML, and it may be noted in this context that the Morse review was highly critical of
scheme promoters who provided their customers with misleading information about the
attitude of HMRC to loan schemes. It is important to note, however, that the petitioner's
challenge is to the lawfulness of the loan charge generally, and is not specific to its
application to his personal circumstances, except in so far as these are material to his EU law
arguments. It is clearly relevant to those arguments that the petitioner was at the time a
non-UK national with an establishment in the UK, being paid for his service (or services) by
entities resident in the Isle of Man, but his averments as to his personal motivation and as to
10
the adverse effects of the loan charge upon him are of little or no relevance to the issues that
I have to decide. Nor, for the same reason, are certain averments by the petitioner, disputed
by HMRC, as to what he was told during telephone conversations with revenue officials.
[18]
It is also necessary to emphasise that the petitioner expressly claims to have standing
to bring these proceedings "as an individual who is affected by the charge imposed by
schedule 11 and schedule 12" to the Finance (No 2) Act 2017. Those schedules do not apply
unless (in the case of schedule 11) there is a connection between the loan and a tax avoidance
arrangement or (in the case of schedule 12) a tax advantage is obtained as a result of the loan
arrangement. On behalf of the respondents it was submitted that the petitioner must
therefore be taken to concede:
in relation to the scheme in which he participated in tax years 2009-10 and
2010-11, either (a) that the loan was not on ordinary commercial terms or
(b) that there was a connection (direct or indirect) between the failure to repay
the loan and a tax avoidance arrangement, or (c) both of those: and
in relation to the scheme in which he participated in tax years 2011-12 to
2014-15, that it is reasonable to suppose that he would obtain a tax advantage
as a result of the scheme.
I agree that this must follow. It also follows, in my view, that in considering the petitioner's
attack on the legislative provisions based upon rights under EU law, it must be borne in
mind that the relevant context is loans entered into in connection with tax avoidance
arrangements and not loan transactions more generally.
11
The issues
[19]
The petition and answers raise the following issues for decision:
(i)
Whether this application for judicial review is incompetent because the
petitioner has an alternative remedy in the form of an appeal to the First-tier
Tribunal against any assessment in relation to the loan charge:
(ii)
Whether the loan charge constitutes an interference with the petitioner's right
to free movement of capital:
(iii)
Whether the petitioner's reliance on the right to free movement of capital is an
abuse of EU law rights:
(iv) Whether the loan charge constitutes a breach of the EU principle of fiscal
legality:
(v) Whether the loan charge amounts to a disproportionately severe and
retrospective penalty.
I address each of these issues in turn.
Issue (i): competency of the application for judicial review
Argument for HMRC
[20]
It was submitted on behalf of HMRC that the application should be refused as
incompetent, because the petitioner had a statutory remedy that he had failed to exhaust.
The petitioner had available to him the usual procedure for challenging an assessment to
tax, namely an appeal to the specialist tax tribunals under section 31 of the Taxes
Management Act 1970. It was accepted that no assessment in relation to the petitioner's
liability to pay the loan charge had yet been made: that might simply be because the charge
had only recently fallen due. If, however, an assessment was made, the petitioner could
12
appeal against it and present all of the arguments made in this petition to the First -tier
Tribunal and in any subsequent appeal from that tribunal's decision. Reference was made
to Autologic Holdings plc v IR Commrs [2016] 1 AC 118 and R (Glencore Energy UK Ltd) v
proceedings to present arguments based upon his personal circumstances which were not
being presented in the application for judicial review.
Argument for the petitioner
[21]
On behalf of the petitioner, it was submitted that there was no substance to HMRC's
contention. As was recognised, there was no assessment or closure notice currently extant
that the petitioner could challenge by appeal under the Taxes Management Act 1970, and
therefore no alternative remedy for him to exhaust before coming to this court. More
fundamentally, HMRC's argument failed to recognise that the present application was a
constitutional law judicial review rather than an administrative law judicial review, raising
questions of whether the enactment by the legislature of the loan charge legislation, and its
operation by HMRC, was or was not compatible with EU law. These were clearly matters
of and for constitutional judicial review: cf R v Secretary of State for Transport, ex parte
Factortame (No 2) [1991] 1 AC 603 and R v Secretary of State for Transport, ex parte Factortame
(No 3) [1992] QB 680 (ECJ). Constitutional judicial review fell within the experience and
expertise of judges of this court acting as a constitutional court. They were not matters
which fell within the experience or expertise of an administrative tribunal with no inherent
jurisdiction, such as the Tax Chamber of the First-tier Tribunal. The issue was one of
appropriateness, not competency. It would not be appropriate to delay resolution of the
13
matters raised by requiring them to be argued again in a tax appeal which might not be
heard until years from now.
Decision
[22]
In my opinion, HMRC's argument is well founded. Although the nature of the
petitioner's challenge could be described as constitutional, in so far as it seeks a declaration
that certain provisions of UK tax legislation are unlawful because they breach principles of
EU law, the critical fact that gives him standing is that he is resisting a charge to income tax
that he expects to be made upon him. That, in my view, is a matter whose resolution has
been allocated by Parliament to the specialist tax tribunals. The relationship in England and
Wales between judicial review and the tax tribunals was recently considered by the Court of
Appeal in the Glencore case (above), in which Sales LJ (with whom the other members of the
court agreed) observed:
"[54] ...The [alternative remedy] principle does not apply as the result of any
statutory provision to oust the jurisdiction of the High Court on judicial review.
In this case the High Court (and hence this court) has full jurisdiction to review
the lawfulness of action by the Designated Officer and by HMRC. The question is
whether the court should exercise its discretion to refuse to proceed to judicial
review (as the judge did at the permission stage) or to grant relief under judicial
review at a substantive hearing according to the established principle governing
the exercise of its discretion where there is a suitable alternative remedy.
[55] In my view, the principle is based on the fact that judicial review in the High
Court is ordinarily a remedy of last resort, to ensure that the rule of law is respected
where no other procedure is suitable to achieve that objective. However, since it is a
matter of discretion for the court, where it is clear that a public authority is acting in
defiance of the rule of law the High Court will be prepared to exercise its jurisdiction
then and there without waiting for some other remedial process to take its course.
Also, in considering what should be taken to qualify as a suitable alternative remedy,
the court should have regard to the provision which Parliament has made to cater for
the usual sort of case in terms of the procedures and remedies which have been
established to deal with it. If Parliament has made it clear by its legislation that a
particular sort of procedure or remedy is in its view appropriate to deal with a
standard case, the court should be slow to conclude in its discretion that the public
14
interest is so pressing that it ought to intervene to exercise its judicial review function
along with or instead of that statutory procedure. But of course it is possible that
instances of unlawfulness will arise which are not of that standard description, in
which case the availability of such a statutory procedure will be less significant as a
factor.
[56] Treating judicial review in ordinary circumstances as a remedy of last resort
fulfils a number of objectives. It ensures the courts give priority to statutory
procedures as laid down by Parliament, respecting Parliament's judgment about
what procedures are appropriate for particular contexts. It avoids expensive
duplication of the effort which may be required if two sets of procedures are
followed in relation to the same underlying subject matter. It minimises the
potential for judicial review to be used to disrupt the smooth operation of statutory
procedures which may be adequate to meet the justice of the case. It promotes
proportionate allocation of judicial resources for dispute resolution and saves the
High Court from undue pressure of work so that it remains available to provide
speedy relief in other judicial review cases in fulfilment of its role as protector of
the rule of law, where its intervention really is required.
[57] In my judgment the principle is applicable in the present tax context. The
basic object of the tax regime is to ensure that tax is properly collected when it is
due and the taxpayer is not otherwise obliged to pay sums to the state. The regime
for appeals on the merits in tax cases is directed to securing that basic objective and
is more effective than judicial review to do so: it ensures that a taxpayer is only
ultimately liable to pay tax if the law says so, not because HMRC consider that it
should. To allow judicial review to intrude alongside the appeal regime risks
disrupting the smooth collection of tax and the efficient functioning of the appeal
procedures in a way which is not warranted by the need to protect the fundamental
interests of the taxpayer. Those interests are ordinarily sufficiently and
appropriately protected by the appeal regime. Since the basic objective of the tax
regime is the proper collection of tax which is due, which is directly served by
application of the law to the facts on an appeal once the tax collection process has
been initiated, the lawfulness of the approach adopted by HMRC when taking the
decision to initiate the process is not of central concern. Moreover, by legislating for
a full right of appeal on fact and law, Parliament contemplated that there will be
cases where there might have been some error of law by HMRC at the initiation stage
but also contemplates that the appropriate way to deal with that sort of problem will
be by way of appeal."
I have set out these observations at length because they appear to me to be equally
applicable to the supervisory role of the Court of Session, and also to be particularly
apposite to the facts of the present case. They acknowledge that the issue is not one of
jurisdiction but of discretion, and explain the reasons why the court should, in exercise of its
15
discretion, decline to exercise its supervisory function in relation to a matter that has clearly
been directed by Parliament to be dealt with by a different statutory process.
[23]
Sales LJ went on in Glencore to contrast the circumstances of that case with those of
In re Preston [1985] 1 AC 835. In that case a taxpayer sought judicial review of a decision of
the Inland Revenue Commissioners to inquire into his tax affairs, on the ground that he had
previously reached an agreement with an inspector of taxes that no further inquiries would
be made, provided that he withdrew certain claims for relief. The House of Lords held that
the issue was amenable for judicial review because it amounted to an allegation of abuse of
power that would not have fallen within the jurisdiction of the tax appeal tribunal. I
respectfully agree that the contrast is helpful in illustrating circumstances in which recourse
is properly made to the supervisory jurisdiction : a similar contrast may be made between
Preston and the present case.
[24]
There was a suggestion in the petitioner's written note of argument, not pursued in
oral argument, that consideration of the EU law issues raised in the petition would be
beyond the jurisdiction of the First-tier Tribunal. It was also contended that these were
matters beyond the experience and expertise of such a tribunal. I reject both of these
contentions. As regards jurisdiction, it is beyond any doubt that the tax tribunals can, and
indeed must, make findings in relation to EU law issues raised by parties (and could until
the UK's departure from the European Union have made references to the Court of Justice
for preliminary rulings). This was made clear by Lord Nicholls of Birkenhead, delivering
one of the majority judgments in Autologic Holdings plc v IR Commrs (above) at paragraphs 16
and 17:
"[16] The second basic principle concerns the interpretation and application of a
provision of United Kingdom legislation which is inconsistent with a directly
applicable provision of Community law. Where such an inconsistency exists the
16
statutory provision is to be read and take effect as though the statute had enacted
that the offending provision was to be without prejudice to the directly enforceable
Community rights of persons having the benefit of such rights. That is the effect of
section 2 of the European Communities Act 1972, as explained by your Lordships'
House in R v Secretary of State for Transport, Ex p Factortame Ltd [1990] 2 AC 85, 140,
[17] Thus, when deciding an appeal from a refusal by an inspector to allow group
relief the appeal commissioners are obliged to give effect to all directly enforceable
Community rights notwithstanding the terms of sections 402(3A) and (3B) and
413(5) of ICTA. In this regard the commissioners' position is analogous to that of
the Pretore di Susa in Amministrazione delle Finanze dello Stato v Simmenthal SpA
(Case 106/77) [1978] ECR 629. Accordingly, if an inconsistency with directly
enforceable Community law exists, formal statutory requirements must where
necessary be disapplied or moulded to the extent needed to enable those
requirements to be applied in a manner consistent with Community law..."
[25]
As regards experience and expertise, it is not in my view for this court to decide,
where Parliament has directed that appeals against tax assessments are to be heard by the
specialist tax tribunals, that some of these are unsuitable for those tribunals because they
raise questions of the supremacy of EU law. Even though the facility of reference for a
preliminary ruling is no longer available, there is no basis whatever for treating a dispute as
inappropriate for hearing by the First-tier Tribunal (with the usual rights of further appeal)
simply because an issue characterised by the taxpayer as "constitutional" has been raised.
[26]
In relation to arguments based on expediency, it would be unrealistic for me not to
recognise that there are broader interests in these proceedings than the tax affairs of th e
present petitioner. As is noted in HMRC's answers, the petitioner appears to have the
support of a group entitled "Loan Charge Judicial Review European Union". That group's
website refers to one, and possibly two, "lead cases" in Scotland: it is reasonable to infer
that this petition is one of them, and that there are therefore other taxpayers with potential
liability to pay the loan charge to whom the outcome of the present challenge is of
considerable interest. (Reference is also made on the website to judicial review proceedings
17
raised in England.) The question is whether I should regard this wider interest as a reason
to allow this application to proceed, thereby providing a decision now rather than requiring
all concerned to await the outcome of an appeal (perhaps not yet even commenced) to the
First-tier Tribunal. I am not persuaded that the fact that there are other taxpayers with
similar interests affects the rationale set out in the observations of Sales LJ in Glencore for
refusing to entertain an application. In my view the present application amounts to an
attempt to pre-empt consideration of the issues raised by the tribunals appointed by
Parliament to hear such issues. I see no reason in principle why a particular group of
aggrieved taxpayers should be accorded favourable treatment in this way. It may be that
those co-ordinating the challenge to the loan charge see advantage in obtaining a court
declarator in general terms, as opposed to hoping for a favourable decision capable of
general application in an appeal to a tribunal by a particular taxpayer. The difference may
however be more apparent than real. Any declarator by this court would be pronounced
against the factual circumstances of the petitioner, and it seems to me that the relevance of
such a declarator to the affairs of other taxpayers would be no less uncertain than the
relevance of the reasoning of an appeal tribunal.
[27]
On behalf of the petitioner, reference was made to dicta pronounced in various
cases including Ruddy v Chief Constable for Scotland 2013 SC (UKSC) 126, Taylor v Scottish
an assertion that HMRC's alternative remedy argument was "vexatious" and "an abuse of
process". It suffices to say that all of the dicta referred to were pronounced in very different
contexts and afford no support for this assertion.
[28]
For these reasons I hold that it is not appropriate for this court to entertain the
petitioner's application for judicial review and that it falls to be dismissed. However, as I
18
was fully addressed on the substantive issues, and in case the matter goes further, I will
express my opinion on them.
Issue (ii): whether the loan charge constitutes an interference with the petitioner's right
to free movement of capital
[29]
Article 63.1 of the Treaty on the Functioning of the European Union ("TFEU") states:
"Within the framework of the provisions set out in this Chapter, all restrictions on
the movement of capital between Member States and between Member States and
third countries shall be prohibited."
Article 65.1 TFEU then provides:
"The provisions of Article 63 shall be without prejudice to the right of Member
States:
(a)
to apply the relevant provisions of their tax law which distinguish between
taxpayers who are not in the same situation with regard to their place of
residence or with regard to the place where their capital is invested:
(b)
to take all requisite measures to prevent infringements of national law and
regulations, in particular in the field of taxation and the prudential supervision
of financial institutions, or to lay down procedures for the declaration of capital
movements for purposes of administrative or statistical information, or to take
measures which are justified on grounds of public policy or public security."
[30]
There are two separate questions within this issue. The first, referred to by the
petitioner as the "threshold issue", is whether the petitioner's circumstances are such as to
entitle him to the protection of the EU right to free movement of capital. The second is
whether the circumstances of the case are such that, as a matter of fact, that right is engaged,
ie whether there is a movement of capital to which the protection is capable of being
applied.
[31]
There was no dispute regarding the first of those questions. As already noted, the
petitioner is a non-UK EU citizen established in the UK and working in the UK for an Irish
19
company. Where, as here, the right founded upon is a free movement right, it is
unnecessary to identify a specific statutory provision implementing EU law in order to
found the right. The circumstances described are clearly sufficient to engage the petitioner's
free movement rights, including the right to free movement of capital. It is unnecessary in
the petitioner's case to address the question whether the interposition of an entity resident in
the Isle of Man (a "third country" for the purposes of article 63) is of importance. It was not
conceded by HMRC that a UK national would satisfy the threshold issue.
Argument for the petitioner
[32]
The real dispute is as to whether the operation of the loan scheme constitutes a
movement of capital. On behalf of the petitioner it was submitted that the loans made to
him were, in form, fact and law, loans and not gifts. There was nothing artificial about
them. They could be called in for repayment. This was not re-directed income and not
therefore within the scope of the RFC 2012 plc decision. There was no trust mechanism.
On a proper analysis, AML contracted with Brookfield that inter alia the petitioner would
provide services as a consultant pilot and made a profit through the provision of contracted
consultants. From those accumulated profits within AML, AML made loans. By its nature,
a loan is not income. The loan capital remained capital unless and until the monies
transferred were not in a loan but a gift. There was a movement of capital from AML in the
Isle of Man to the petitioner in the UK.
[33]
EU law gave a wide definition to the word "capital" in the context of article 63. In the
classification of nomenclature for the purposes of Annex 1 to Council Directive 88/361/EEC,
capital movements are taken to cover inter alia "operations to repay credits or loans", and
the list of capital movements includes short, medium and long term financial loans and
20
credits. Reference was made to Ritter-Coulais v Finanzampt Germersheim [2006] ECR I-1737,
in which a wide definition of capital was evident. A fortiori the loans in these proceedings
were capital. Even if the loan capital fell to be regarded as being "revenue" in nature, that
did not prevent the free movement of capital provisions from being engaged. In Sandoz v
Finanzlandes-direktion für Wien, Niederösterreich und Burgenland [1999] ECR I-7041, the Court
of Justice determined that legislation which deprived Austrian residents of the possibility
of benefiting from the absence of taxation associated with loans obtained outside Austria
was likely to deter them from obtaining such loans, and therefore constituted an obstacle
to the free movement of capital.
Argument for HMRC
[34]
On behalf of HMRC it was submitted that article 63 had no application to the
petitioner's circumstances. It was clear from his averments that the loan schemes were
conduits through which flowed the money paid by Ryanair in respect of his work as a pilot,
starting at Ryanair and ending at the petitioner. Whatever unusual elements may have been
inserted into that structure, the movements were entirely income earned by working.
[35]
Article 63 contained no definition of a capital movement. The classification in
Council Directive 88/361/EEC did not indicate that all loans were capital. On the basis of
Court of Justice case law, it was clear that:
free movement of capital is a freedom based on the "object of the transaction
rather than on the nature of the persons who carry them out": Persche v
paragraph 35;
21
movements of capital are financial operations essentially concerned with
investment rather than remuneration for a service: Luisi and Carbone v Ministero
in order to determine whether national legislation falls within the scope of one
or other of the freedoms of movement, the purpose of the legislation concerned
must be taken into consideration: see eg Persche v Finanzamt Ludenscheid
(above), paragraph 28;
if the purpose of the legislation does not determine that issue, then, "account
should be taken of the facts of the case in point in order to determine [which is
the fundamental freedom] to which the dispute in the main proceedings relates":
[36]
In the present case, the object of the loans was to pass the petitioner's income to him.
Given the terms of the loans, AML was plainly not making an investment. The purpose of
the relevant national legislation was to secure that remuneration was appropriately charged
to tax. In any event it was inappropriate to assess the petitioner's averments by reference to
article 63. The primary freedoms engaged by the facts of the case were the free movement
of workers and freedom to provide services. It was only necessary to consider whether
schedules 11 and 12 were compatible with those freedoms: Fidium Finanz AG v Bundesanstalt
infringement of those freedoms was asserted.
22
Decision
[37]
In my opinion the petitioner has failed to establish that there is a movement of
capital that engages his EU law right. In the absence of a definition in the Treaties of the
expression "movement of capital", the decision of the Court of Justice in Luisi and Carbone
(above) provides a useful starting point. The question in that case was whether a physical
transfer of bank notes was to be regarded as a movement of capital. The Court noted that
physical transfer of bank notes was included in the list of capital movements in the annex to
the then extant directives adopted in relation to movement of capital, but considered that
this did not necessarily imply that such a transfer itself constituted a movement of capital.
In particular, the Court held at paragraph 22 that it was not to be classified as a movement of
capital where it corresponded to an obligation to pay arising from a transaction involving
the movement of goods or services.
[38]
In my opinion there is a similar correspondence in the circumstances of the present
case. The movements of money and services can be looked at in one of two ways. Taking a
broad purposive approach, it could be said that the overall effect of the arrangements
entered into was that the petitioner's services as a pilot were provided by him to Ryanair in
exchange for the payments that the petitioner received from AML, consisting partly of a
small salary and partly of non-commercial loans. On the basis of the Court's analysis in
Luisi and Carbone, that is not to be classified as a movement of capital because it amounted to
payment for services. On a narrower approach it could be said that the petitioner provided
service/services to AML consisting of his agreement to being supplied as a pilot to Ryanair,
in exchange for payments, in the form of a small salary and non-commercial loans, received
from AML. Again, in terms of Luisi and Carbone, there is no movement of capital because the
23
payments from AML corresponded to an obligation to pay arising from a transaction
involving the provision of the petitioner's services to AML.
[39]
This approach is consistent with the analysis of the Court of Justice in the more
recent case of Fidium Finanz (above). Fidium was a Swiss company offering credit online to
customers abroad. The German financial authorities prohibited Fidium from carrying on
business in Germany without authorisation. Fidium raised proceedings based on breach of
the right to free movement of capital, and a request for a preliminary ruling was made to the
Court on the question whether an undertaking in a country outside the EU could rely on the
free movement of capital in respect of the commercial grant of credit to residents of a
member state, or whether the provision of such financial services was covered solely by the
freedom to provide services. The point was that Fidium, being registered in a "third
country" could rely upon free movement of capital but not upon freedom to provide
services in a member state. The Court noted at paragraph 30 that:
"Admittedly, it is possible, in certain specific cases in which a national provision
concerns both the freedom to provide services and the free movement of capital, that
that provision may simultaneously hinder the exercise of both of those freedoms."
At paragraph 34, the Court stated, by analogy with previous decisions:
"Where a national measure relates to the freedom to provide services and the free
movement of capital at the same time, it is necessary to consider to what extent the
exercise of those fundamental liberties is affected and whether, in the circumstances
of the main proceedings, one of those prevails over the other... The Court will in
principle examine the measure in dispute in relation to only one of those two
freedoms if it appears, in the circumstances of the case, that one of them is entirely
secondary in relation to the other and may be considered together with it..."
On the facts of that case, the Court decided (paragraph 49):
"It is apparent that, in the circumstances of the main case, the predominant
consideration is freedom to provide services rather than the free movement of
capital. Since the rules in dispute impede access to the German financial market
for companies established in non-member countries, they affect primarily the
freedom to provide services. Given that the restrictive effects of those rules on the
24
free movement of capital are merely an inevitable consequence of the restriction
imposed on the provision of services, it is not necessary to consider whether the
rules are compatible with [what is now article 63]..."
[40]
By analogy, the present case is concerned predominantly with the petitioner's
freedom to provide services. Regardless of whether the petitioner is treated as providing
services to Ryanair or to AML, it is not argued that the imposition of the loan charge
constitutes an unjustified infringement of his freedom to provide such services. On either
analysis, any restriction on free movement of capital is, in my opinion, clearly secondary to
the freedom to provide services, because it arises only as a result of the method of
remuneration adopted in the arrangements entered into between the petitioner and AML. I
recognise that the treatment of the right of free movement of capital as secondary in Fidium
Finanz (and also in Test Claimants in the Thin Cap Group Litigation v IR Commrs
[2007] ECR I-2107: see paragraph 34) was in a context where there was a restriction of the primary
freedom (freedom to provide services in Fidium Finanz: freedom of establishment in Thin
Cap Group Litigation). That, however, does not appear to me to affect the analysis that where
one of the freedoms prevails over another, the matter must be determined by reference to
the prevailing freedom.
[41]
The authorities relied upon by the petitioner do not, in my view, cast any doubt
upon this analysis. Annex I to Directive 88/361/EEC contains a non-exhaustive classification
of capital movements for the purposes of what is now article 63. Loans are mentioned under
four of the headings in the classification, namely Heading I (which includes "Long-term
loans with a view to establishing or maintaining lasting economic links"); Heading VII -
Credits Related to Commercial Transactions or to the Provision of Services in which a
Resident is Participating; Heading VIII (Financial Loans and Credits not included under I,
VII and XI); and Heading XI - Personal Capital Movements (which in addition to "loans"
25
includes items such as gifts and endowments, and inheritances and legacies). In an
explanatory note to Heading VIII, it is stated to include
"Financing of every kind granted by financial institutions, including financing
related to commercial transactions or to the provision of services in which no
resident is participating. This category also includes mortgage loans, consumer
credit and financial leasing, as well as back-up facilities and other note-issuance
facilities".
Some of these classifications are clearly inapplicable to the loans received by the petitioner.
Reliance is placed in the petitioner's argument only on Heading VIII (which is stated to
include short, medium and long term loans), but the terms of this classification do not in my
opinion support the argument that every loan, in whatever circumstances, is a movement of
capital. As the Advocate General observed in Persche (above), the freedom is based on the
object of the transaction, and one therefore returns to the fact that the object of the loans
received by the petitioner was to pay him for his services as a pilot. For the reasons already
set out, that is not a movement of capital.
[42]
The Ritter-Coulais case was decided under reference to free movement of workers.
In the course of its decision, the Court noted that failure to take account of income losses
(ie expenditure) relating to a house in France for the purposes of determining liability to tax
on income received in Germany might fall within the scope of the free movement of capital
under what is now article 63, but that general observation does not assist in circumstances of
the present case. Nor, in my view, does the case of Sandoz (above) provide any support for
the proposition that loans are by their nature movements of capital. The loans in that case
clearly were, but that was not in dispute.
[43]
In summary, one comes back to the observation of the Court in Luisi and Carbone (at
paragraph 21) that "movements of capital are financial operations essentially concerned
with the investment of the funds in question rather than remuneration for a service". I hold
26
that in the circumstance of this case, the petitioner's EU law right to free movement of
capital has not been infringed because the arrangements that he entered into through AML
did not constitute movements of capital.
Issue (iii): whether reliance by the petitioner on the right to free movement of capital
would be an abuse of that right
[44]
In the light of my decision on issues (i) and (ii), this issue is doubly academic, but I
shall express my views on it briefly. It is convenient to begin by narrating the argument for
HMRC.
Argument for HMRC
[45]
On behalf of HMRC it was submitted that the petitioner was not entitled to rely on
article 63 because to do so would be an abuse of the freedom it conferred. A person was not
entitled, under cover of EU rights, improperly to circumvent national legislation: Cadbury
Schweppes plc v IR Commrs [2006] ECR I-7995: X GmbH v Finanzamt Stuttgart Körperschaften,
had done amounted to fraud or tax evasion: "improper" in this context meant not
corresponding to economic reality. The loan schemes were artificial arrangements to avoid
tax on work done that did not correspond to economic reality. If, having regard to the
petitioner's averments, the court considered that there was a realistic possibility that he h ad
had no subjective intention to avoid tax, an evidential hearing should be fixed.
27
Argument for the petitioner
[46]
On behalf of the petitioner, it was submitted that HMRC's argument was
misconceived. In the first place there was no evidential basis upon which to make
allegations about the petitioner's motivation in entering into the loan scheme. Evidence
would be required of (a) a combination of objective circumstances in which, despite formal
observance of the conditions laid down by the EU rules, the purpose of those rules had not
been achieved, and (b) a subjective element consisting in the intention to obtain an
advantage from the EU rules by creating artificially the conditions laid down for obtaining
it: see eg Hungary v Slovakia [2013] 1 CMLR 21. Neither was present here.
[47]
Of greater assistance was the statement by the Court in Cadbury Schweppes at
paragraph 35 that
"the fact that a Community national, whether a natural or a legal person, sought to
profit from tax advantages in force in a member state other than his state of residence
cannot in itself deprive him of the right to rely on the provisions of the Treaty".
It was held in that case that only conduct involving the creation of wholly artificial
arrangements which did not reflect economic reality, with a view to escaping the tax
normally due on the profits generated by activities carried out on national territory, would
justify a restriction on a fundamental freedom. The UK Supreme Court had found that loan
schemes were not a sham, nor devoid of legal effect. They were not wholly artificial
arrangements which did not reflect economic reality. They were designed at least in part
and at least for some participants to cater for a gap that existed in the market for contractor
workers to be engaged without acquiring the hallmarks of employment. It followed that
loan schemes did not reach the very high bar required by Cadbury Schweppes in order to
permit a restriction on a fundamental Treaty freedom.
28
Decision
[48]
I am not impressed by the petitioner's argument based upon absence of evidence of
motivation. In so far as the petitioner seeks to assert that the arrangements were designed to
cater for a "gap in the market" in relation to contractor workers, he contradicts the factual
grounds upon which this petition proceeds. I have already made the point that the statutory
provisions in schedules 11 and 12 to the Finance (No 2) Act 2017 which the petitioner seeks
to challenge apply only where the loans are made as part of a tax avoidance scheme. If that
had not been the case, then the loan charge would not apply to the petitioner and he would
have no standing to pursue the present application. I must proceed on the basis that the
purpose of arrangements in terms of which the petitioner received most of his earnings as a
pilot in the form of loans rather than salary or trading income was the avoidance of income
tax that would otherwise have been payable. Whatever assurances the petitioner may have
been given by the scheme promoter are of no consequence.
[49]
That said, I am not convinced that an issue arises of abuse of a Treaty freedom. The
question in the Cadbury Schweppes case was whether the right to freedom of establishment
precluded national tax legislation (in this case in the UK) which imposed a charge on a
parent company in respect of the profits made by a controlled foreign company, ie a
subsidiary set up in another member state with a favourable tax regime (in this case Ireland).
Having made the statements relied upon by HMRC and by the petitioner respectively in the
present proceedings, the Court went on to make the following further observations at
paragraph 49:
"... (I)t is settled case-law that any advantage resulting from the low taxation to
which a subsidiary established in a Member State other than the one in which the
parent company was incorporated is subject cannot by itself authorise that Member
State to offset that advantage by less favourable tax treatment of the parent
company... The need to prevent the reduction of tax revenue is not one of the
29
grounds listed in Article 46(1) EC or a matter of overriding general interest which
would justify a restriction on a freedom introduced by the Treaty."
The Court went on, however, to conclude:
"51. On the other hand, a national measure restricting freedom of establishment
may be justified where it specifically relates to wholly artificial arrangements aimed
at circumventing the application of the legislation of the Member State concerned...
...
55. (I)n order for a restriction on the freedom of establish ment to be justified on the
ground of prevention of abusive practices, the specific objective of such a restriction
must be to prevent conduct involving the creation of wholly artificial arrangements
which do not reflect economic reality, with a view to escaping the tax normally due
on the profits generated by activities carried out on national territory.
...
64. In order to find that there is [a wholly artificial arrangement intended solely
to escape a tax] there must be, in addition to a subjective element consisting in the
intention to obtain a tax advantage, objective circumstances showing that, despite
formal observance of the conditions laid down by Community law, the objective
pursued by freedom of establishment, as set out in paragraphs 54 and 55 of this
judgment, has not been achieved (see, to that effect, Case C-110/99 Emsland-
[50]
The judgment in Cadbury Schweppes was considered and further explained by the
Court in X GmbH v Finanzamt Stuttgart - Körperschaften (above). In this case X, a German
company, was charged to tax on profits received by Y, a Swiss company in which X held
a 30% shareholding. The profits were derived from debts purchased by Y from another
German company. The charging provisions applied only to shares held in companies
established in third countries, and the question referred was whether this was an
infringement of the right to free movement of capital. At paragraph 23, the Court noted that
"...the referring court is... uncertain whether the grounds capable of justifying a
restriction on freedom of establishment set out in the judgment [in Cadbury
Schweppes] apply in relationships with third countries and, if so, what qualitative and
quantitative requirements must the shareholding in a company established in a third
country satisfy in order for it not to be regarded as `wholly artificial'".
30
The Court responded as follows (paragraph 84):
"...(I)n the context of the free movement of capital, the concept of `wholly artificial
arrangement' cannot necessarily be limited to merely the indications, referred to in
paragraphs 67 and 68 of [Cadbury Schweppes], that the establishment of a company
does not reflect economic reality, since the artificial creation of the conditions
required in order to escape taxation in a Member State improperly or enjoy a tax
advantage in that Member State improperly can take several forms as regards
cross-border movements of capital. Indeed, those indications may also amount to
evidence of the existence of a wholly artificial arrangement for the purpose of
applying the rules on the free movement of capital, in particular when it proves
necessary to assess the commercial justification of acquiring shares in a company that
does not pursue any economic activities of its own. However, that concept is also
capable of covering, in the context of the free movement of capital, any scheme
which has as its primary objective or one of its primary objectives the artificial
transfer of the profits made by way of activities carried out in the territory of a
Member State to third countries with a low tax rate."
[51]
It can be seen that in both Cadbury Schweppes and X GmbH, the Court approached the
matter not on the basis of abuse of the right to free movement of capital, but rather by
posing the question whether an interference with that right was justified on the ground of
prevention of abusive practices. It seems to me that a similar approach would be
appropriate in the present case. I find nothing in the factual circumstances of this case to
indicate that the petitioner had the subjective intention of obtaining an abusive advantage
from his EU right of free movement of capital: there is nothing in either party's case to
suggest that reliance upon that right was an integral part of the loan schemes into which the
petitioner entered.
[52]
Approaching the matter in the same way as the Court did in Cadbury Schweppes and
X GmbH, I am satisfied that if I had held that the legislation under challenge constituted an
interference with the petitioner's right to free movement of capital, I would have held that
such interference was justified. Applying the test enunciated by the Court in X GmbH above
to loan schemes which ex hypothesi have as their primary objective or one of their primary
objectives the avoidance of income tax and national contributions which would otherwise be
31
payable on a person's earnings from an employment or from self-employment, the concept
of "wholly artificial arrangement" is applicable. It is clear from the observations of the
Court that the applicability of the concept is not restricted to sham transactions, or even to
transactions that do not reflect economic reality. The fact that the loans made under loan
schemes are not shams, in the sense that they are in theory repayable, does not therefore
prevent the interference with free movement of capital from being justified. It may be noted
in passing that, contrary to a submission by the petitioner, the opinion of the Advocate
General (de la Tour) in Ecotex Bulgaria EOOD, Case C-544/19 (18 November 2020) supports
this conclusion, noting at paragraph 80 that it is established by the terms of article 65.1 TFEU
(above) and the jurisprudence of the Court that the need to prevent "la fraude et l'évasion
fiscales", ie both tax evasion (fraude fiscale) and tax avoidance (évasion fiscale) constitutes a
legitimate reason capable of justifying a restriction on free movement of capital.
Issue (iv): Does the loan charge constitute a breach of the EU principle of fiscal legality?
Argument for the petitioner
[53]
On behalf of the petitioner, it was submitted that the EU law principle of "fiscal
legality", captured in the maxim nullum tributum sine lege meant that no tax could be levied
unless it was provided for by and in accordance with rules established by law which "enable
a taxable person to foresee and calculate the amount of tax due and determine the point at
which it becomes payable". This principle could be regarded as forming part of the EU legal
order as a general principle of law: Case C-566/17 Zwizek Gmin Zaglbia Miedziowego w
Polkowicach v Szef Krajowej Administracji Skarbowej. Rights under article 17 CFR could not be
less than under article 1, protocol 1 to the European Convention on Human Rights. It was
contrary to the principle of fiscal legality/legal certainty/protection of legitimate expectation,
32
except in exceptional circumstances shown to be justified by an objective in the general
interest, for the point in time from which a measure falling within the scope of EU law took
effect to be set by a national legislature as being before its publication. Retroactive
application of a tax falling within the ambit of EU law would only be EU law compatible if it
could be demonstrated to the court by cogent and relevant evidence to comply with the EU
law principles of fiscal legality.
[54]
A burden was imposed on the respondents to show that the legislation imposing the
loan charge was both appropriate for securing the attainment of a legitimate objective and
did not go beyond what is necessary in order to attain it. It was for the respondent s to
supply the court with all of the evidence necessary for this court to be satisfied that the
measures taken by the UK authorities were in accordance with the EU law principle of
proportionality. The court then had to examine critically and objectively such evidence -
statistical or ad hoc data or by other means - as was supplied, in order to determine whether
it could properly be concluded from the evidence that, in its application to the petitioner, the
loan charge was an appropriate means of attainment of the objectives pursued or,
alternatively, whether it was open to the UK authorities to attain its legitimate objectives by
measures that were less restrictive of the petitioner's fundamental freedoms under EU law.
In the present case the court had been supplied with no such evidence by the respondent.
Mere assertions in the affidavits relied upon by HMRC did not suffice, and the court was not
entitled to substitute itself for the respondents in setting out a justification.
[55]
Nor had HMRC addressed the "less restrictive alternative" limb of the proportionality
test. Even if it were claimed that the UK authorities had a legitimate objective of (a) closing
down loan schemes for the future and (b) recovering past tax where HMRC had inadequate
knowledge of arrangements taxable under the law then in place, objective (a) could be
33
achieved by bringing all loans and quasi-loans into charge in the circumstances set out in the
amendments made to ITEPA and ITTOIA, and objective (b) could be achieved by legislation
similar to schedule 18 to the Finance Act (No 2) 2017.
[56]
In relation to legitimate expectation, it had to be borne in mind that loan schemes
had been meeting with success in the courts during the time when the loan charge was being
devised and enacted. There was accordingly no justification for retroactive imposition.
[57]
In all the circumstances, the only conclusion that the court could properly draw on
the evidence before it was that the retrospective imposition of the loan charge constituted an
unjustified interference with a fundamental Treaty freedom. It was too broad in scope and
contravened EU law, and was therefore unlawful.
Argument for HMRC
[58]
On behalf of HMRC it was submitted that the loan charge legislation did not breach
any of the EU law principles. As regards proportionality, it was agreed that the test was
whether the measure in question was suitable for securing the attainment of the objective
in question, and did not go beyond what was necessary in order to attain that objective:
X GmbH (above), paragraph 70. The court had to be satisfied on the basis of material and
submissions put to it that the test was met: Scotch Whisky Association v Lord Advocate
[2016] 1 WLR 2283 (ECJ) at paragraph 56, as discussed by the Supreme Court in the same litigation
at 2018 SC (UKSC) 94, paragraph 14. It was not necessary for the respondents to prove that
no other conceivable means could achieve the aim pursued: Scotch Whisky Association (ECJ)
at paragraph 55.
[59]
The legislation imposing the loan charge had been designed around the need to
ensure that arrangements not involving tax avoidance were excluded from it. There was a
34
consultation procedure during which questions were asked as to what arrangements should
be excluded. In the legislation as enacted, including the amendments to ITEPA and ITTOIA,
there were, apart from the general exclusions for ordinary commercial loans not connected
to tax avoidance arrangements, a variety of entry conditions and exclusions. The legislation
was directed at tax avoidance on income from employment and self-employment, and the
tax charges were restricted to income on which tax had not otherwise been charged. Any
taxpayer such as the petitioner had the opportunity, both in the course of an enquiry or
investigation by HMRC that could lead to an assessment, and in an appeal to the First-tier
Tribunal against any assessment, to prove that none of the main purposes of the scheme on
the basis of which such assessment had been made was tax avoidance.
[60]
As regards the availability of less restrictive means, the Government had previously
tried to end the type of tax avoidance in issue by a number of lesser means, using not only
legislation but also litigation. The types of schemes targeted by the present legislation had
nonetheless continued. In all of these circumstances, the legislation was proportionate.
[61]
In relation to legal certainty and legitimate expectation, it was accepted that
application of the loan charge depended on facts that had occurred before it was published,
but that did not make it retroactive. Tax charges arose only so far as loans remained unpaid
around 2 years after publication of the legislation, and 3 years after notice had been given of
the Government's intention. On many occasions from 2009 onwards, as the Morse review
had accepted, HMRC had stated publicly that these amounts were liable to tax : and that
users of loan schemes should not expect to escape tax and national insurance contributions
on amounts received. From 9 December 2010 at the latest, it was clear that such schemes
were not effective to avoid tax. In these circumstances, the legislation did not breach the
35
principles of legal certainty or legitimate expectation: nor was there any breach of the
Charter of Fundamental Rights.
Decision
[62]
I begin by considering the case of Zwizek, relied upon by the petitioner. As always
in relation to ECJ jurisprudence, context is important. Zwizek was concerned not with
retroactivity but with a potential conflict between a basic principle of VAT law, namely that
deduction of input VAT was permissible only to the extent that the expenditure had been
used for the purpose of the taxable person's economic activity, and more fundamental rights
and general principles of EU law, which would override the VAT law principle. The
problem was that deductibility of input VAT on supplies used only partly for the purposes
of economic activities was regulated not by a provision of national law but by an
administrative practice. Advocate General Sharpston observed at paragraph 78:
"I am prepared to accept the proposition that the principle that no tax can be levied
unless it is provided for by law (in other words the principle of fiscal legality: nullum
tributum sine lege) does form part of the EU legal order. It may be seen as a specific
expression, in the context of tax law, of the freedom to conduct business, the
fundamental right to property and the general principle of legal certainty."
At paragraph 87, she noted that in some member states, the principle of fiscal legality
formed part of a longstanding constitutional tradition, having first been enacted "in the
United Kingdom" in the Bill of Rights of 1689. In the context of the case before her, she
concluded (at paragraph 101) that the constitutional traditions common to the member
states, like the case-law of the Strasbourg court on article 1, protocol 1 ECHR, required that
the essential elements of a tax be provided for by law in a sufficiently clear, precise and
foreseeable manner, but did not impose an obligation to regulate every detail exhaustively.
36
The Advocate General's opinion in this regard was effectively adopted by the Court at
paragraph 39 of its judgment:
"...(I)t is important to note that, as is apparent from the constitutional traditions
common to the Member States, the principle of fiscal legality may be regarded as
forming part of the EU legal order as a general principle of law. Although that
principle requires, as observed by the Advocate General in point 110 of her Opinion,
that any obligation to pay a tax, such as VAT, and all the essential elements defining
the substantive features thereof must be provided for by law, that principle does not
require every technical aspect of taxation to be regulated exhaustively, as long as the
rules established by law enable a taxable person to foresee and calculate the amount
of tax due and determine the point at which it becomes payable."
[63]
In my opinion, the principle of fiscal legality, as described by the Advocate General
and by the Court is not infringed by the legislation in the Finance (No 2) Act 2017 that
imposed the loan charge. Although the tax base of the charge consists of loans made before
the enactment (or even the announcement) of the relevant statutory provisions, the charge
itself was, at the time of enactment, both precise and prospective. Taxpayers such as the
petitioner knew with a high degree of certainty what the loan charge would be imposed
upon, namely loans remaining outstanding some 2 years later. There was accordingly no
infringement of the nullum tributum sine lege principle. There is nothing in the Court's
expression of that principle to prohibit a tax that falls due after the time of its introduction
but uses as its base a financial resource which was already in existence prior to its
introduction.
[64]
If, contrary to the views that I have expressed, the enactment of the loan charge
did engage one of the petitioner's EU law rights, ie the right to free movement of capital
or the principle of fiscal legality, it would have been necessary to address the issues of
proportionality, legal certainty and legitimate expectation.
37
Proportionality
[65]
Where a national measure has the effect of restricting an EU law freedom, the
principle of proportionality requires the member state in question to satisfy the court that
the restriction is necessary in order to achieve the declared objective, and that that objective
could not be achieved by prohibitions or restrictions that are less extensive, or that are less
disruptive of trade within the European Union: see eg Scotch Whisky Association v
Lord Advocate (above) in the ECJ at paragraph 53. I accept the petitioner's submission that
the burden of proving proportionality rests upon the state. What is required by way of
proof will, however, vary considerably from case to case. In the circumstances of the present
case, assessment of proportionality seems to me to be straightforward. The declared
objective of the loan charge was to recover tax on loans made in the course of schemes
whose purpose, or main purpose, was the avoidance of tax and national insurance
contributions on the income of the recipients of the loans. It is not difficult to discern that
the proportionality principle requires that tax be imposed on such loans but not upon any
transactions not falling within the foregoing description. The key requirement is that any
loan unconnected with a tax avoidance arrangement must be excluded from the scope of the
restrictive provision. If that were not done, the principle would not have been observed.
[66]
On the basis of the material before me, including the affidavit of Ms McGeehan, the
person within HMRC who has had responsibility for income tax policy during the material
period, it is apparent that the proportionality principle has been respected in that the
statutory provisions in schedules 11 and 12 to the Finance (No 2) Act 2017 apply only to
loans and quasi-loans falling within Part 7A of ITEPA or sections 23A to 23H of ITTOIA,
ie where (as regards employment income) the loan is not on commercial terms and is
connected with a tax avoidance arrangement or (as regards trading income) it is reasonable
38
to suppose that the recipient will obtain a tax advantage as a result of the arrangement. The
legislation contains a large number of express exclusions of types of employee benefits
which apply equally to the loan charge. It was not submitted that the legislation has
misfired in this regard in that it catches loans unconnected with arrangements to avoid
income tax: that is not the petitioner's case.
[67]
In these circumstances it appears to me that HMRC have discharged the burden of
showing that if the loan charge operates as a restriction on either freedom of movement of
capital or on the principle of fiscal legality, it is necessary in order to achieve its declared
objective, and moreover that that objective could not be achieved by restrictions that are less
extensive or less disruptive of trade within the European Union.
Legal certainty and legitimate expectation
[68]
As regards legal certainty and legitimate expectation, it is necessary to have regard to
the background to the imposition of the loan charge in 2017. I have already mentioned that
the Government's intention to introduce legislation to nullify the tax advantages of loan
schemes featuring an employment relationship was announced on 9 December 2010 by the
Exchequer Secretary to the Treasury, who stated inter alia:
"...(T)he Government are introducing legislation to tackle arrangements involving
trusts or other vehicles used to reward employees which seek to avoid or defer the
payment of income tax or National Insurance Contributions (NICs)... In many cases,
these third-party arrangements allow an employee to enjoy the full benefit of a sum
of money paid or assets provided while arguing that, because of the structure of the '
arrangements, there is no legal right to the money or assets...
The legislation inserts a new part 7A into the Income Tax (Earning and Pensions)
Act 2003. The legislation ensures that where a third party makes provision of what
is in substance a reward or recognition, or a loan, in connection with the employee's
current, former, or future employment, an income tax charge arises...
39
There will be protection for specified types of arrangements involving third
parties-including registered pension schemes, approved employee share schemes
and ordinary commercial transactions...
The legislation will take effect from 6 April 2011 and apply to rewards, recognitions
or loans which are earmarked for the benefit of an employee, or former or
prospective employee, or otherwise made available on and after that date.
In addition, anti-forestalling provisions apply to the payment of sums (including
loans) and the provision of readily convertible assets for the purposes of securing
the payment of sums (including loans) where the sum is paid or the asset is provided
between 9 December 2010 and 5 April 2011 where, if paid or provided on or after
6 April 2011, they would be caught by the legislation..."
[69]
It should be borne in mind that the "employer" in this regard might or might not
mean the person for whom services were actually being performed. The circumstances of
the petitioner's case afford an example of this: during the tax years 2009-10 and 2010-11,
the petitioner was treated as self-employed by Ryanair but was an employee of AML. The
anti-avoidance legislation in the Finance Act 2011 therefore applied to him in respect of that
part of the tax year 2010-11 after 9 December 2010. His self-employment status so far as
Ryanair was concerned was not relevant to that period or indeed subsequently.
From 2011-12 until 2014-15, the loans received by the petitioner were received not in
consequence of any employment relationship but because of his membership of the AML
Partners' Collective Company. Schemes of this kind, based upon provision of services
rather than upon an employment relationship, were not specifically targeted by
anti-avoidance legislation until 2017.
[70]
Against that background, the question is whether the introduction of the loan charge
in 2017, extending to payments received by employees before 2011 and to payments
received by individuals providing services before 2017, constituted a breach of the principles
of legal certainty and legitimate expectation. I reiterate that in these proceedings I am
concerned with the loan charge provisions as they now stand, following the amendments
40
made to them in 2020 to reflect the recommendations of the Morse review. It is not
necessary for me to express a view as to whether the above EU principles were breached by
the loan charge as originally enacted, when it extended inter alia to loans received as far back
as 1999, or to certain loans in respect of which no assessment to income tax could by 2017
have been made.
[71]
So far as loan schemes falling within the scope of the Finance Act 2011 provisions are
concerned, I am in no doubt that the imposition of the loan charge in respect of loans
received after 9 December 2010 (the date of the Ministerial statement) was compliant with
the principles of legal certainty and legitimate expectation. By 2016, when the Government's
intention to introduce the loan charge was announced, no question remained as to whether
such loans were chargeable to income tax and national insurance contributions: the issue
had become one of collection of the tax due. There could, in my opinion, have been no
legitimate expectation that any of those loans would not be charged to tax (unless of course
they had been properly disclosed in a return and HMRC had failed to open a timeous
enquiry). In such circumstances it was consistent with those EU principles for legislation to
be introduced to recover tax that had fallen due. As Sir Amyas Morse put it in his report (at
pages 3-4):
"There was a need for a new policy in 2016. HMRC had had considerable success in
getting large corporates to settle after the introduction of new legislation in 2011.
However, loan schemes were still used over 10,000 times in 2011-12. This, and
subsequent usage, deprived the Exchequer of tax that was clearly due following the
new legislation. It was reasonable for the government to act to ensure that this tax
was collected.
The Loan Charge therefore emerged in 2016 out of a desire to shut down the use of
loan schemes, for reasons of fairness to other taxpayers, as well as value for money,
practicality, and to collect revenue for public services.
This followed over 65,000 instances of loan scheme usage from April 2011 -
March 2016, and a decline in the number of schemes (and taxpayer usage of them)
41
being disclosed to HMRC. In spite of the law being clear, HMRC were therefore not
always able to identify the relevant users or efficiently collect the tax that was due.
This delay effectively delivered an unjustified advantage to taxpayers participating
in loan schemes..."
[72]
Could it be contended, however, that the position was different regarding loan
schemes not falling within the scope of the Finance Act 2011 because they utilised
partnership or self-employment instead of employment? The provisions of the Finance
(No 2) Act 2017 which brought such arrangements within ITTOIA were not retrospective.
There are, however, other factors to be considered. I accept the evidence of Ms McGeehan
that there was a growth of such schemes after 2011 in an attempt to circumvent the
provisions of Part 7A of ITEPA, inserted by the 2011 Act. The circumstances of the
petitioner afford an example of an individual who participated in an employment-based
loan scheme until 2011-12 and a partnership-based scheme thereafter. It is also important to
recall that although their position had not always been vindicated by the courts, HMRC
were continuing after 2011 to challenge loan schemes not falling within Part 7A under
pre-existing law including other anti-avoidance provisions. I am not therefore persuaded
that an individual participating in a non-employment-based loan scheme between 2011
and 2017 had a legitimate expectation that loans that he or she received would not, by one
means or another, be held to be chargeable to income tax. The legislative policy was clear, as
was the intention of HMRC to nullify any tax advantage from such schemes. In so far as the
imposition of the loan charge on such schemes included any element of retrospection, it did
not interfere with any legitimate expectation of the users of such schemes. Any interference
with legal certainty was justified in the public interest. Accordingly, had it been necessary
to do so, I would have held that neither legal certainty nor legitimate expectation was
42
breached by the imposition of the loan charge in either schedule 11 or schedule 12 to the
Finance (No 2) Act 2017.
Issue (v): whether the loan charge amounts to a disproportionately severe and
retrospective penalty
Argument for the petitioner
[73]
On behalf of the petitioner it was submitted that the loan charge, properly viewed,
was to be regarded as a penalty imposed by the UK Government for the purpose of forcing
taxpayers such as the petitioner to reach settlements with HMRC (indeed, the charge was
referred to, somewhat tendentiously, as "the loan charge penalty" throughout the
petitioner's submissions). It was intended to have deterrent and punitive effect so as to
encourage such settlement. The provisions of schedules 11 and 12 to the Finance (No 2)
Act 2017 resulted in a penalty liability being imposed on individuals for having used
schemes that were "known to and approved by HMRC".
[74]
The relevant Strasbourg case law was to the effect that, in order to be compliant with
inter alia article 1, protocol 1 ECHR, tax assessments and related obligations had to (i) have a
proper basis in domestic law; (ii) be accessible, precise and foreseeable in their effect; and
(iii) be applied by the domestic authorities in a manner which was consistent, coherent and
ECHR proportionate. At least the same level of protection applied in terms of article 17
CFR. Separately, article 49 CFR provided that no heavier penalty could be imposed for a
criminal offence than the one that was applicable at the time when the offence was
committed, and that the severity of the penalty must not be disproportionate to the offence.
Even if national law might classify the procedure giving rise to the imposition of the loan
charge as administrative, given that the intent and effect of its imposition was not simply to
43
recover unpaid tax that was properly due at the time when the loan monies were received,
but also to punish past conduct and to deter future like conduct, the petitioner could pray in
aid the protections afforded under EU law in relation to the imposition of criminal penalties.
[75]
Properly analysed under EU law, the loan charge was akin to a criminal penalty
imposed in relation to the petitioner's exercise of his fundamental Treaty rights relative to
free movement of capital. It had been imposed on him in breach of the principle of legal
certainty. In all the circumstances it constituted an unjustified penalty imposed with
retrospective effect on taxpayers such as the petitioner on the exercise of his fundamental
rights.
[76]
Moreover, even if the court were satisfied that the loan charge penalty legislation
was capable of being operated in an EU proportionate way, it also had to be satisfied that
loan charge was being administered and applied in relation to the petitioner among others
in a manner that was EU law proportionate. It was clear from the findings of the Morse
review that in many cases (including the petitioner's), the approach taken by HMRC to the
enforcement of the legislation was designed to be heavy-handed and punitive, in order to
force taxpayers to settle whether that would legitimately be in their interests or not. The
review could not be regarded as a historical snapshot of a situation that no longer existed.
[77]
Other features that made the loan charge disproportionately severe included:
the fact that in addition to the charge, the loan remained outstanding and
repayable if demanded. There had been cases where the loan book had been
sold to a third party and repayment demanded:
the effect of the charge was to cumulate liabilities in a 3-year period, potentially
resulting in charges to tax at higher rates with a view to forcing a settlement.
44
Argument for HMRC
[78]
On behalf of HMRC it was submitted that the loan charge was not a penalty within
the meaning of EU law. To the extent that the charges exceeded tax on any alternative basis,
they were imposed on amounts that were, in reality, remuneration for work done, but
otherwise bore no tax because of an artificial structure put in place to avoid incurring the tax
normally due. The charge was made in the normal way for an income tax charge, namely at
a percentage rate by reference to the taxpayer's total taxable income for the year. Some of
the charge might be covered by the taxpayer's personal allowances, and it could lead to
liability at the basic or a higher rate of income tax. Credit was given to the extent that the
income in question had already given rise to another income tax charge. All of this was
normal for an income tax charge: but inconsistent with the concept of a penalty. There was
no identifiable "offence", and no payment beyond tax charged on amounts that were,
fundamentally, remuneration for work done. All that happen ed was that the petitioner had
failed in his endeavour to escape the tax and national insurance contributions fairly due
from him. The "penalty", if there was any, could not be said to be more than the tax that
had been avoided by use of the schemes. To the extent they were relevant, any requirements
in terms of justification, proportionality and legal certainty were met.
Decision
[79]
It is not entirely clear to me what additional point the petitioner seeks to make by
characterising the loan charge as a penalty. In so far as the complaint is related to
interference with the right to free movement of capital or the principles of proportionality
and legal certainty, I have already addressed these matters and held, for the reasons set out
45
above, that there is no such interference. It is not readily apparent what additional EU law
protections, referable to criminal penalties in particular, are being founded upon.
[80]
In any event I accept HMRC's argument that the loan charge is not properly to be
characterised as a penalty for the purposes of application of EU law rights. As was
submitted, it is a charge to income tax on sums received by taxpayers such as the petitioner
in consideration of the provision of service or services, which sums have not otherwise
borne income tax. The notion of "penalty" connotes a surcharge payable by way of
punishment in addition to an amount of tax due: there is nothing of that kind here. The
petitioner's characterisation of the charge as a punishment for past conduct has no
foundation in fact. Cases such as Åklagaren v Åkerberg Fransson [2013] 2 CMLR 46 and
Menci v Procura della Repubblica [2018] 3 CMLR 12 which are concerned with whether or not
a penalty is to be regarded as a criminal penalty are of no assistance where, as here, the
question is whether there is any penalty at all.
[81]
I recognise that for many taxpayers, including the petitioner, the imposition of the
loan charge will have come as a very unwelcome surprise when it was announced in 2016
and enacted in 2017. The Morse review noted (at paragraph 4.29) that
"...(T)axpayers may have still entered into a scheme on or after 9 December 2010,
and not understood that tax would be considered due. We received a large volume
of evidence that individuals did not understand at the time that the schemes would
be considered tax avoidance and would not have used them if they did. Many
people affected by the Loan Charge clearly feel a real stigma through being
associated with tax avoidance, which is exacerbated through not having understood
the nature of loan schemes."
In this context, the review was critical of the lack of direct communication between HMRC
and taxpayers into whose affairs an investigation had been opened, and even more critical of
loan scheme promoters who continued to market schemes after 2010 when legislative action
was announced. It would be fair to say that some of the original features of the 2017
46
legislation, removed in the light of the Morse recommendations, could arguably have been
regarded as having a flavour of punishment about them. But these proceedings are
concerned with the law as it now stands. That law does not go beyond ensuring the
collection of tax on payments received since 2010 by taxpayers as remuneration for work
done, in respect of which no tax has otherwise been paid. The issue of whether a loan upon
which the charge has been paid could also be subject to a demand for repayment, whether
by the original lender or by an assignee, seems to me to be one which lies between any
taxpayer in that position and the scheme promoter responsible for devising the terms of the
loan. In any event, the petitioner's characterisation of the charge as a penalty falls to be
rejected.
Disposal
[82]
For all of these reasons I shall dismiss the petition. Questions of expenses are
reserved.
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