At first glance tax and human rights are strange bedfellows, every tax regime has the same objective - to extract funds from citizens as cheaply and as quickly as is humanly possible and as yet physical, as opposed to mental, torture has not yet been added to the armoury of tax collectors. Tax and the Human Rights Act 1998KEY POINTS
- The Human Rights Act 1998 comes into force on 2 October 2000.
- The Act has important implications for tax payers and advisers.
- Its biggest impact is likely to be on procedure, penalties, appeals, investigations and disclosure obligations.
- The validity of certain substantive provisions of UK tax law are also in doubt.
- The Act is an important new resource which advisers should be ready to deploy.
The Human Rights Act 1998 (‘the Act’) comes into force on 2 October this year. The reason for the delay between the Act getting onto the statute book and its commencement was to give time for government bodies to prepare themselves for the new regime and one might say, less charitably, to allow backlogs of cases to be cleared out of the way before the new Act complicated matters.
At first glance tax and human rights are strange bedfellows, every tax regime has the same objective - to extract funds from citizens as cheaply and as quickly as is humanly possible and as yet physical, as opposed to mental, torture has not yet been added to the armoury of tax collectors. However, as tax is the government’s own money and as government makes the rules, it is not surprising that, on the whole, the deck is stacked in favour of the state. Thus unlike every other area of civil litigation, the burden of proof is on the taxpayer in a tax appeal to show why he should not be charged to tax. Retrospective legislation is now almost routine in the tax field and the tax authorities, in particular Customs & Excise, are endowed with extensive powers of search and seizure and can force taxpayers to disclose documents which in any other context would qualify for protection as legally professionally privileged documents.
Surprisingly, the European Convention on Human Rights (‘the ECHR’), which the Act partially incorporates, does have significant implications for tax practitioners and payers and impacts both on tax procedural rules and on substantive provisions of the tax code. It is a new resource for tax payers of which tax practitioners should be aware and ready to deploy.
In this Article I will look at the likely impact of the Act both on procedural issues (which is where the Act is likely to have most impact) and at some provisions of the tax code which may be contrary to the ECHR. First a brief explanation of the ECHR and the effect of the Act.
The ECHRThe ECHR is an international treaty signed in the early 1950s in the aftermath of the Second World War. Even though the UK was an early signatory, as a mere Treaty the ECHR had little or no legal effect in the UK. An aggrieved citizen could take the UK to the European Court of Human Rights (‘EctHR’), but any judgment in his favour was not legally enforceable and the whole process was slow and expensive.
The relevant articles for taxThe ECHR consists of a number of Articles setting out basic principles of human rights. The principal Articles which are relevant for tax purposes are:
- Article 1 of the First Protocol which protects the right to property. This protects the right to the enjoyment of property and it has been held that tax is an interference with this right. Not surprisingly however, there is an exception for the levying and collection of tax, although this must be done in an orderly and proportionate manner.
- Article 6 which guarantees the right to a fair trial in the determination of civil obligations and affords further rights where a person is charged with a criminal offence. There is a debate over whether Article 6 applies to tax assessments. However, it would apply to matters other than tax assessments dealt with by tax tribunals, in particular it would apply to NICs appeals, and may apply to TMA 1970, s. 20 applications and almost certainly to tax-geared penalties. Whether a matter is civil or criminal depends on the categorisation adopted by the ECHR, not by our law. One of the consequences of this is that tax-geared penalties are almost certainly criminal for these purposes. This means that proceedings to determine tax geared penalties are entitled to the protection afforded to criminal trials This affects the standard of evidence and there is a right to legal aid for impecunious applicants.
- Article 14 which prohibits discrimination. Article 14 prohibits discrimination on any ground in the enjoyment of ECHR rights. Thus discrimination based on gender is prohibited by Article 14. Discrimination can be justified if there is shown to be both an objective justification for the discrimination and if the measures adopted are proportionate.
- Article 8 which requires respect for private and family life. This protects the right to privacy and protects personal and business records whether kept at home or in the office. An interference with this right can be justified if it is in the public interest or in the interests of national security.
The ECHR has been running for nigh on fifty years and during that time there have been around 240 cases brought before it relating to tax matters and around 23 per cent can be said to have succeeded. New tax cases are being brought on a frequent basis. Whilst more sets of reports are emerging, the best resource is the European Court of Human Rights’ own website (at www.dhcour.coe) which has a comprehensive collection of the case-law, which is very easy to search and download.
Whilst the Articles set out above are the principal Articles relevant for tax, unsuccessful challenges have been mounted to tax provisions under Articles 3 and 4, prohibition of torture, slavery and forced labour (in relation to the obligation to operate a system similar to PAYE), and even under Article 2, the right to life, where the applicant’s wife died after a visit from the tax inspector!
The ActThe Act in outline has the following effects:
- All legislation and subordinate legislation must be interpreted so as to conform with Convention rights (which are the rights guaranteed by the ECHR). This is ‘strong’ principle of interpretation, much broader than normal principles of statutory interpretation. Words can be read into statutes to make them conform and words can be omitted or given ‘artificial’ meanings.
- If a conflict between legislation and Convention rights cannot be cured by interpretation, then the UK legislation wins. There is no override of UK legislation. This is why the Act is only a partial incorporation of the ECHR. An applicant can, however, seek from the High Court and above (not tax tribunals) a declaration of incompatibility. This has no effect on the parties’ rights, but merely alerts the government to the conflict, which, hopefully, would take steps to amend the law.
- All public bodies, and that includes the Revenue, Customs and the tax tribunals, must, in exercising their discretion, abide by Convention rights. If they fail to do so, their decision will be unlawful (unless the terms of the statute gave them no choice).
- The Act also confers a right to damages for breach of a Convention right. Such a claim will only lie against a tax tribunal if it did not act in good faith.
Practical implicationsI set out below the areas where the Act may have an impact. The list is not meant to be exhaustive, but merely to deal with those issues which practitioners are most likely to come across in practice. I also include examples of issues which have been raised in other jurisdictions and have failed. It should be appreciated that the issues raised by a human rights challenge are complex and it will be some time before a clear set of guidelines emerge from decisions of the appeal courts. However, if you have a problem in these areas, the Act is well worth considering to see if it will help.
I will deal first with procedural issues and then with challenges to substantive provisions of UK tax law.
- Tax investigations and TMA 1970, s.20 notices - These raise a number of Convention points. Clearly the tax system depends on taxpayers disclosing relevant documentation and the State must have the right to demand such documents. Outside of this area however, for example where the investigation is more in the nature of a ‘fishing expedition’, an investigation may affect the right to privacy under Article 8, or if it is with a view to getting hold of incriminating documents which may lead to a criminal prosecution, may be a breach of the Article 6 right not to incriminate oneself. Section 20 notices routinely seek disclosure of documents which would otherwise benefit from legal professional privilege, this override of the privilege may be a breach of the Article 6 right to a fair trial or a breach of Article 8. It is arguable that the ex parte procedure for obtaining s.20 notices is a breach of Article 6 and that a taxpayer is entitled to be present and to make submissions. Issues also arise as to notices issued to third parties (e.g. banks) to disclose information relating to another taxpayer’s affairs (a challenge to such a notice based on Convention rights recently failed in R v IRC ex parte Banque Internationale a Luxembourg SA  STI 919).
- Tax-geared penalties - the case-law suggests that tax-geared penalties are criminal penalties for Article 6 purposes. Hence most direct tax penalties, and VAT civil evasion penalties are criminal for this purpose. Arguably a failure by the Revenue authorities to follow the PACE guidelines (under the Police and Criminal Evidence Act 1984) in collecting evidence relevant to such penalties will invalidate the imposition of such penalties. The standard of evidence at appeals against penalties should be higher than in a normal tax assessment appeal. If a penalty appeal is heard together with a tax assessment appeal, the appeal against the underlying assessment should benefit from the same protections as the penalty hearing, as the penalty determination will turn in part on the underlying tax appeal. If Article 6 in its criminal aspect applies, there is a right to legal aid, to a public hearing and to reasons for the decision. There would also be a breach of Article 6 if the proceedings were subject to ‘unreasonable delay’. Furthermore any legal advice given by a Clerk to the Commissioners should be given in public and the parties should be given the opportunity to comment on it.
- Appeals to the General and Special Commissioners and VAT and Duties Tribunal As discussed above, there is considerable debate as to whether Article 6 applies to appeals against tax assessments. It is almost certain that it does apply to NICs appeals, and to appeals against tax-geared penalties and hence to appeals against tax assessments heard with appeals against such penalties. If it applies, there is a right to a fair trial, which may include a higher standard of evidence than often prevails so that unreliable hearsay or anonymous evidence should be excluded, a right to a public hearing, and to a reasoned decision and the right to comment upon any legal advice given by a Clerk to the tribunal to the panel members.
- TMA 1970, s. 100A permits penalties to be imposed on a deceased’s executor by reference to the acts of the deceased. If the penalties are criminal for ECHR purposes (i.e. are tax-geared), then the case-law of the ECHR suggests that such penalties cannot be imposed as they infringe the right, more or less universally recognised in criminal proceedings, to the presumption of innocence guaranteed by Article 6 as criminal liability cannot survive death. By definition the deceased cannot contest the imposition of the criminal penalty! In a Swiss case (AP TP and MP v Switzerland Application No. 220919/92), a penalty for tax evasion was imposed on the deceased’s heirs by reason of the acts of the deceased. The penalty was tax-geared and was criminal for ECHR purposes. The ECtHR held that the imposition of the penalty conflicted with Article 6.
As, under UK law, the imposition of a penalty is a discretionary decision, any decision to impose a tax-geared penalty on the executors of the deceased, if, as suggested, it conflicted with Article 6, would be unlawful under the Act.
- Inheritance Tax Act 1984, s. 11(3) - the definition of ‘dependant relative’ in this section (dispositions for maintenance of family) includes a widowed, separated or divorced mother, but not a widowed, separated or divorced father, which amounts to obvious discrimination on grounds of gender contrary to Article 14.
- Revenue’s managerial discretion in the collection of the tax - the Revenue has a discretion in the collection of tax to forgive tax in certain circumstances. A decision to forgive tax for a particular group (e.g. a tax amnesty for a part of the black economy) is prima facie discriminatory against other taxpayers and will need to be objectively justified and be shown to be proportionate.
- Revenue’s policy of selective prosecution - under this policy you may have two taxpayers in exactly the same position, only one of whom is prosecuted. This policy is inherently unfair and discriminatory. It has been upheld as proper as a matter of English law (R v IRC ex parte Mead and Cook  STC 482), but under Article 14 will be unlawful unless it can be objectively justified and shown to be proportionate.
- Differential treatment of the employed and self-employed - this has been run in a number of cases and has always failed on the ground that the self-employed and the employed are in different situations so that any difference in treatment is not discriminatory.
- Sexual orientation - the main disadvantage for same sex couples is the inability to marry and to acquire the right to the inheritance tax spouse exemption. The current case law of the ECtHR suggests that for the moment at least, denial of the right to marry to same sex couples does not constitute a breach of Convention rights, although as societal attitudes change, this too may change (certain European countries now give varying degrees of legal recognition to same sex relationships).
- Prospective legislation - typically in the Budget an announcement is made as to a change in the law which is to have immediate effect, but the actual legislation is not available even in draft until the Finance Bill appears and then the final form is not settled until the Bill is passed into law. A taxpayer who relies on the terms of a press release may find that the final legislation has a different effect. If he loses out as a result, he may be able to claim a breach of Article 1 of the First Protocol (right to property) as his property has been taken away in breach of the rule of law, which requires all citizens to be in a position to determine the legal consequences of their actions.
- Retrospective legislation - may well give rise to a breach of Article 1 of the First Protocol, as it is clearly interfering with settled legal rights. The decisions of the ECtHR however suggest that States will be given a considerable margin of appreciation in this area if they have a good reason for making the legislation retrospective.
- Get familiar with the Act and the four Articles of the Convention most relevant for tax (the Convention appears as a Schedule to the Act):
- Article 1 First Protocol
- Article 6
- When you have an investigation, s. 20 notice, tax appeal, or penalty appeal check to see whether the Act can help
- If you have a case where you cannot see any hope on the English statute, check to see whether the Act can help as a last resort!
This article appeared in Tax Adviser September 2000.