Retrospective taxation: the democratic dilemma

It was Benjamin Franklin who said that “In this world nothing can be said to be certain, except death and taxes.”

The phenomenon of retrospective taxation came much later but undoubtedly Franklin would never have questioned the requirement for a fiscal system that is fair.

On 18 November 2010 the Chartered Institute of Taxation (CIOT), in a discussion paper on the matter, said that: “We have become concerned about the increasing use of retrospective action in the tax system. Retrospection is damaging to confidence in the tax system as it undermines the principles of stability and certainty. In an internationally competitive world, frequent retrospection reduces the attractiveness of the UK to potential inbound investors.”

The CIOT report continued by stating that: “We do not say there is never a case for retrospection… However, it is something that should be used with extreme care and justified at length.”

That same concern has been echoed by the Treasury Select Committee. This has been heightened by the Chancellor saying in his recent Budget statement that he would not hesitate to move “swiftly, without notice and retrospectively” if homebuyers managed to dodge stamp duty. The Treasury used retrospective law to prevent Barclays Bank introducing a tax avoidance scheme.

Chairman of the Treasury Select Committee, Andrew Tyrie MP (Photo credit: Wikipedia)

The chairman of the Select Committee, Andrew Tyrie MP, reported that his committee had serious reservations about the practice and several senior corporate bosses are saying that it may damage confidence in the tax system. There is also the question of whether it is democratic in the sense of the UK’s (unwritten) constitution. The process of law can at times be frustrating. There is Mr. Loophole (Nick Freemen) who legitimately, but perhaps innovatively, manages to free celebrities from motoring offences.

But retrospective taxation is insidious and against the principle of individual freedom. If the Chancellor wants to collect all the stamp duty that he feels is owed to him he and his officials should write the Finance Bill with greater care. Retrospective taxation is being justified by Downing Street PR hype. It is wrong; as the CIOT says, it should only be used in rare and extreme circumstances.

By Tony Drury