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A leading tax body has called the increasing use of retrospective tax legislation as inherently unfair.

Coming soon after the BN66 case, in which a court decided contractors using offshore tax schemes could be taxed retrospectively, the Chartered Institute of Taxation (CIOT) has raised concerns about the increased use of retrospective action in the tax system.

The CIOT raised its concerns following a ministerial announcement last week in which the tax rules relation to manufactured dividends will be amended - with the legislation taking effect from 1st October 2007.

Retrospective taxation is "inherently unfair"

John Whiting, Tax Policy Director at the CIOT, said:

"The use of retrospective legislation always concerns us greatly; we think it damages the key principle of certainty in the tax system that is so important to its reputation and is inherently unfair.

"We can understand that at times the Government wants to take action to 'confirm the general understanding of the tax system' in the light of questions raised. However, this needs to be used with great caution: it must not dislodge the principle that the taxpayer is taxed on the wording of the legislation in place at the time of their actions. We are taxed on what legislation says, not what HMRC thinks it says. Of course the taxpayer would have to sustain their interpretation in the Courts."

The Montpelier / Huitson BN66 case

In its news release, The CIOT noted that recent case law has shone a spotlight on the issue by considering section 58 of the Finance Act 2008 - a provision that closed an apparent loophole in the law but with retrospective effect that went back 20 years.

Anti-avoidance legislation, which was introduced via the 2008 Finance Act, has allowed the Government to take retrospective action against certain offshore structures. Budget Note BN66, issued in March 2008, targeted tax schemes which exploited a loophole in the double taxation treaty between the UK and the Isle of Man.

In a recent court case in which IT contractor Robert Huitson unsuccessfully argued that HMRC couldn't tax him retrospectively on earnings drawn prior to the enactment of the BN66 rules. At the hearing, the judge pointed out that HMRC had warned participants in such offshore schemes that they might be challenged, and that the backdating of tax demands did not breach human rights and was "in the relevant circumstances proportionate".

John Whiting continued:

"We need a clear statement as to when retrospection will be used and its boundaries - and Parliament needs to consider such boundaries with care."