Retrospective taxation and the rule of law

The UK is considering legislation to prevent people creating multiple trusts in order to pass wealth on to their family free of tax. Setting up a tax-exempt trust as a way of avoiding inheritance tax is very common – particularly when the tax is levied at 40%, and now that rising house values are taking so many families into the tax.

New HM Revenue & Customs rules will make it no longer possible to set up several trusts, each with its own tax-free allowance of up to £325,000. The new rules will come into force in 2015. But in order to prevent a rush of people creating new trusts, the reforms will apply retrospectively to all trusts established since June 6.

Well, there you go again. It is quickly becoming obvious that the rule of law does not apply to UK taxation any more. Already, schemes under which people arrange their affairs in 'tax efficient' ways that are perfectly in line with the UK's (absurdly long and complex) tax code, are being struck down by HMRC, simply because they are arrangements designed to reduce a person's tax bill. And now, it seems, HMRC can now make up new rules and make them apply to actions that take place even before the rules are put in place.

This is a mediaeval attitude to justice, redolent of the age of Morton's Fork. That was the ingenious design of John Morton, Archbishop of Canterbury in the 15th century, who argued that a man living modestly must have plenty of money saved and could therefore be taxed, while a man living extravagantly was so obviously rich that he could easily afford to be taxed.

Retrospective legislation is not confined to tax law. A 2013 House of Commons Standard Note, Number SN/PC/06454, lists many examples, all since 1996 – covering tax on caravans, compensation for mesothelioma, British activities in Antarctica and wireless licence fees. Retrospective liability for war crimes was introduced in 1991. The Conservative minister Nick Herbert used emergency legislation to reverse a High Court ruling on detention. And the Conservative Health Secretary Jeremy Hunt in 2012 retrospectively validated the authority of clinicians to detain people under the Mental Health Act.

Most of these measures were done for good reasons (rather than to raise money, as the tax changes have been). That does not make them any less of an affront to justice. You cannot be guilty of something that was not a crime at the time. The detention of a person by an unauthorised official does not become legitimate by backdating that authorisation. Unless the law is known and certain, there can be no justice. I predict, not a rush of new family trusts being formed, but a rush of tax advisers petitioning the High Court on this very point.