Backdated tax law hits 2,000 freelancers

The government's decision to retrospectively close a loophole in the UK Isle of Man double taxation treaty is threatening the livelihoods of more than 2,000 freelancers.

The impact of backdated legislation in the Finance Bill 2008, to deal with affected schemes, has been so "severe" that all other retrospective provisions should be diverted.

Ministers should submit them for scrutiny by the Parliamentary Joint Committee on Human Rights, which issued these calls in a critical report on the retrospective effect of Section 58.

Clauses 66-67 effectively get round 1987 legislation, which dictated a double taxation treaty does not affect UK residents' liability to UK tax on their share of income or gains from a foreign partnership.

While the government says that is still true, its bill means that UK scheme users "remain liable to UK tax", and have done since 1987, "despite the elaborate, artificial structure designed to exempt them."

As the signatories of a No 10 petition against Section 58 have stressed, the committee said such structures have been in existence for a number of years, "with HMRC's knowledge.

But, it added, "HMRC had not sought to close them down until the 2008 Finance Bill."

Nigel Jagger, a former IT freelancer who used the scheme, said: " In the case of the double taxation scheme, HMRC had known about the scheme since 2001, and it was fully disclosed on tax returns, but they waited seven long years before taking any action.

"The use of retrospective legislation should be a concern to all taxpayers, not just freelancers. Once the precedent is set that HMRC can go back in time and change the law to suit their own devices, then there is no telling where this could lead."

His concerns seem to be shared by the committee, which said scheme provider NT Advisors had alerted it that Clauses 66 and 67 seemed to breach human rights.

The firm blasted the provisions as retrospective in effect, unwarranted and inappropriate.

Seeming to agree, the committee said that, based on evidence it had seen of hardship among affected freelancers, the provisions were "at least an arguable breach" of Article 1 Protocol of the human rights act.

As a result, the committee has written to Stephen Timms, the financial secretary to the Treasury, asking for the "government's detailed justification" for the retrospective effect of the provisions, which were introduced by Alistair Darling, the chancellor.

According to the committee's evidence, almost 60 freelancers said they were unable to meet the tax demand as a result of the law changing, almost 30 would have to sell their home and a number would go bankrupt.

Of the more than 2,000 taxpayers affected, some reported that financial worry from the 'clarification' of the bill had caused them mental health problems and marriage breakdown.

Mr Jagger reflected: "If HMRC don't like an arrangement they should either close it as soon as they become aware of it or pursue it vigorously through the courts.

"Given that they have now committed 25% of their £4billion annual budget to fighting tax avoidance, there can be no excuse for resorting to retrospective legislation."