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Contents
Introduction
Retrospective tax legislation is a fraught and controversial area of law and policy.
Defined most starkly by the Chartered Institute of Taxation (CIOT), it involves provisions that impose or increase a tax charge on income earned, gains realised, or transactions concluded before the legislation was announced. In theory, it is reserved for exceptional cases.
In practice, recent developments suggest that retrospective taxation is becoming a tool of choice in HMRC’s enforcement arsenal – particularly when it finds itself on the losing end of litigation.
This note explores the history and principles underpinning retrospective taxation in the UK, key judicial authorities such as Huitson, St Matthews and Wilkes, and recent examples where the government has used retrospective measures in controversial circumstances.
It also reflects on the implications for the rule of law, taxpayer certainty, and proportionality under both domestic law and the European Convention on Human Rights (ECHR).
What is Retrospective Taxation?
The CIOT distinguishes between:
- Retrospective legislation: legislation that applies to events before the law is announced.
- Retroactive legislation: legislation that applies to income or gains arising after the law is enacted, but from arrangements or transactions entered into earlier.
The government frequently blurs this line, asserting that changes are merely “clarificatory” or “confirm long-standing practice”.
The Legal Framework
While Parliament is sovereign and can legislate retrospectively, such legislation may conflict with fundamental rights under the ECHR – particularly Article 1 of Protocol 1 (A1P1) and Article 6 (right to a fair trial).
However, the courts have repeatedly held that retrospective tax legislation is not inherently incompatible with the ECHR if it pursues a legitimate aim and is proportionate.
Key examples:
- Article 7 ECHR prohibits retrospective criminal laws—but tax law is civil in nature.
- A1P1 ECHR protects “peaceful enjoyment of possessions”—but not speculative tax advantages or uncrystallised claims.
Historical Development: From Rees to Primarolo
In 1978, Peter Rees MP articulated a constitutional convention that retrospective tax legislation should be a last resort and follow certain procedural safeguards (“Rees Rules”).
For many years, this standard was broadly respected.
The 1999 Primarolo Statement, however, marked a turning point. Dawn Primarolo warned that HMRC would act to counter tax schemes without prior notice.
This created a chilling effect and triggered strong professional opposition, including a 2005 ICAEW report and CIOT discussion paper in 2010.
In 2011, the government introduced a Protocol on Unscheduled Announcements, reaffirming that changes with effect prior to announcement would be “wholly exceptional.”
The last decade has tested that assurance.
Case Law: Huitson, St Matthews and the Courts’ Endorsement of Retrospection
Huitson v HMRC [2011]
Huitson, a UK-resident contractor, used an Isle of Man treaty scheme to avoid income tax.
When legislation closed the scheme with full retrospective effect, Huitson challenged the change under the ECHR. Both the High Court and Court of Appeal rejected his claim:
- The avoidance was artificial.
- The aim of preventing abuse of tax treaties was legitimate.
- The retrospective change struck a fair balance.
St Matthews (West) Ltd v HMRC [2014] EWHC 1848 (Admin)
This case challenged retrospective SDLT anti-avoidance legislation following the Chancellor’s 2012 warning.
The High Court again upheld the measure:
- The budget announcement made retrospection foreseeable.
- There was a compelling public interest.
- Tax arguments do not amount to “possessions” under A1P1.
These decisions show that judicial tolerance for retrospection is high – especially in anti-avoidance contexts.
Recent Examples of Retrospective or Retroactive Legislation
In recent years, a range of tax measures have been introduced that impose retrospective or retroactive effects, blurring the line between clarity and legal overreach.
The 2019 Loan Charge
The loan charge applied initially to disguised remuneration loans dating back to 1999, targeting arrangements involving Employee Benefit Trusts (EBTs), Employer Financed Retirement Benefit Schemes (EFRBS), and other contractor loan schemes.
The charge is imposed on any outstanding balance of such loans on 5 April 2019, regardless of when the loan was made.
Despite being framed as retroactive, the effect is retrospective – applying a new tax charge to historic transactions that, at least it was argued, outside the scope of taxation at the time.
The All-Party Parliamentary Group (APPG) on the Loan Charge has repeatedly criticised the measure as unjust and a breach of natural justice.
Several judicial reviews have been brought under A1P1 ECHR and Article 6, though none have so far succeeded.
The 2020 Morse Review prompted limited concessions (excluding pre-2010 loans in certain cases), but the charge remains largely in place.
Critics argue the measure creates a chilling precedent: that lawful historical transactions may be reclassified and penalised under a future interpretation of fairness.
High Income Child Benefit Charge (HICBC) and Wilkes v HMRC (2021)
The Wilkes decision ruled that HMRC could not use discovery assessments under s29 TMA 1970 to collect unpaid HICBC from taxpayers who had not submitted self-assessment tax returns.
This significantly curtailed HMRC’s ability to enforce the charge in hundreds of cases.
In response, the government introduced retrospective legislation via Finance Act 2022, declaring that HMRC’s previous approach had always been the intention of Parliament. The amendment applies back to 2013 – the year HICBC was introduced – and was presented as a “clarification,” despite having the effect of reversing a court decision with full retrospective force.
This undermined not only judicial authority but the rule of law, by rewriting the rules after the fact.
Budget 2020–2021: Retroactive ‘Clarifications’ and Misleading Labels
Several measures in Budget 2020 and Budget 2021 were introduced with retrospective effect or disguised as “clarificatory.”
- Automated Tax Penalties: HMRC’s use of computer-generated penalties (e.g. for late returns or late payment) was found to be procedurally flawed by the courts, particularly in Goldsmith and Mohamed v HMRC. Parliament amended the legislation retrospectively to validate HMRC’s use of automation.
- Inverclyde Property LLP: The FTT found that HMRC had wrongly applied Corporation Tax rather than Income Tax rules to LLPs. Budget 2021 included legislation to reverse the decision retroactively, despite the court’s clear findings.
- Entrepreneurs’ Relief (ER) ‘Anti-Forestalling’: ER was rebranded as Business Asset Disposal Relief and its lifetime limit drastically reduced in March 2020. Anti-forestalling provisions applied to transactions completed before the announcement, thereby increasing tax retrospectively. Planning which was lawful and effective when undertaken was rendered ineffective with backdated consequences.
These measures reflect a recurring pattern: court decisions or planning that challenge HMRC’s interpretation are quickly neutralised by legislative amendments, often backdated and cloaked as clarification.
The Increasing Use of “Clarificatory” Law to Reverse Judicial Defeats
The government’s growing use of the label “clarificatory” to justify retrospective legislation is one of the most troubling recent developments in UK tax law.
While Parliament has the legal authority to legislate with retrospective effect, the constitutional convention and the 2011 Protocol made clear that this should only occur in exceptional circumstances.
In the last decade, however, HMRC has increasingly used this tactic not just to close loopholes, but to neutralise adverse judgments. The pattern is now familiar:
- HMRC loses a case, often due to poor drafting or overreach.
- It characterises the ruling as judicial misunderstanding or uncertainty.
- The law is changed retroactively, often described as a clarification.
Examples of this include:
- Wilkes v HMRC: Discovery assessments found to be inapplicable. HMRC rewrote the law back to 2013.
- BN66 (Huitson): Legislation retroactively denied DTA-based treaty relief.
- Automated penalties: Validated post-factum despite prior judicial censure.
In each case, the label of “clarification” conceals what is substantively a reversal of a legal defeat.
These interventions undermine legal certainty, erode judicial independence, and betray the principles underpinning the rule of law.
As tax barrister Keith Gordon has written, “if HMRC is permitted to change the law every time it loses, then the courts become irrelevant.” The law becomes not what Parliament enacts or what the courts interpret, but what HMRC wishes it to be.
The concern is not merely theoretical. It affects:
- Advisers, who must constantly second-guess HMRC’s views, not just what the statute says.
- Taxpayers, whose reliance on settled law becomes a gamble.
- The system as a whole, which risks moving from rules-based to arbitrary enforcement.
The CIOT has rightly warned that retrospective “clarifications” should be regarded as retrospective legislation in disguise – and opposed accordingly.
ECHR Challenges Post-Brexit
Even post-Brexit, the UK remains a signatory to the ECHR.
A1P1 remains a potential avenue for challenge, although recent case law reaffirms that retrospective tax laws are permitted if proportionate and predictable.
However, critics argue that UK courts apply too deferential a standard. As Professor Judith Freedman has argued, “the use of retrospective legislation to overturn judicial decisions should be viewed with constitutional suspicion, not as a routine fix.”
Where Next?
The CIOT, ICAEW and other professional bodies have repeatedly called for a reaffirmation of the 2011 Protocol’s principles.
In 2022, the CIOT reiterated that retrospection should be wholly exceptional, and “never used simply because HMRC disagrees with a court ruling.”
Meanwhile, retrospection continues to be used to:
- Patch weak legislation.
- Reverse judicial losses.
- Increase deterrence, even where tax lost is small.
Conclusion
Retrospective tax legislation was once exceptional. It is now becoming normalised, especially where HMRC suffers legal setbacks.
The courts have shown tolerance, but the constitutional implications are serious. Taxpayers must be able to rely on the law as written.
If Parliament and HMRC continue to treat legal clarity as an inconvenience to be rewritten after the fact, then trust in the tax system will continue to erode.
Retrospective tax law, particularly when framed as “clarification”, risks transforming tax from a rules-based system to a discretionary one.
That should alarm anyone who believes in the rule of law.
If you would like to discuss retrospective taxation further or explore how it may affect your tax planning or legacy arrangements, please get in touch.
