Legislation to counter income tax avoidance by imposing a "loan charge" on payments received as loans rather than income did not constitute an interference with the free movement of capital, nor were they a breach of the EU principle of fiscal legality, nor did they amount to a disproportionately severe and retrospective penalty, a Court of Session judge has held.
Lord Tyre in the Outer House further ruled that the challenge by judicial review of an assessment to pay a loan charge was incompetent, since the petitioner had not exhausted the remedy of taking an appeal to the specialist tax tribunals.
The judge ruled against Niall Finucane, an airline pilot and Irish/Swiss citizen who worked for Ryanair between 2001 and 2014 based at Prestwick. From 2008 he was treated by Ryanair not as an employee but as self employed, which he believed was to change his employment rights in relation to Ryanair. After taking his own tax advice he entered into a loan scheme which involved the payments on behalf of Ryanair being made to an Isle of Man entity, which paid him a small salary (or payment for services) together with loans comprising the bulk of the payments. He paid no income tax on the latter payments.
Legislation was first introduced in 2011 to counter such tax avoidance, but it was as a result of a further charge enacted in 2017 (with effects mitigated in 2020) that the petitioner raised proceedings. He had not yet been assessed to tax but anticipated that he would be.
Lord Tyre first held the petition incompetent. "Although the nature of the petitioner’s challenge could be described as constitutional," he said, "in so far as it seeks a declaration that certain provisions of UK tax legislation are unlawful because they breach principles of EU law, the critical fact that gives him standing is that he is resisting a charge to income tax that he expects to be made upon him. That, in my view, is a matter whose resolution has been allocated by Parliament to the specialist tax tribunals." Notwithstanding the issues raised, or the wider application of the case, it was the tribunals that had to determine them.
However he went on to give his opinion on the substantive issues raised. On the free movement of capital question, he held on the basis of European authority that a transfer of funds was not to be regarded as a movement of capital "where it corresponded to an obligation to pay arising from a transaction involving the movement of goods or services", a situation that applied in the present case. Had there been an interference with that freedom, it would have been justified as, although there was no indication that the petitioner had intended to take abusive advantage of the freedom, the scheme was a "wholly artificial arrangement" such as had been held to justify interference.
The principle of fiscal legality was recognised in EU law, but was not infringed as taxpayers such as the petitioner "knew with a high degree of certainty what the loan charge would be imposed upon", and a tax could be imposed on a financial resource which already existed at the time of its introduction.
Further the charge satisfied the test of proportionality: "HMRC have discharged the burden of showing that if the loan charge operates as a restriction on either freedom of movement of capital or on the principle of fiscal legality, it is necessary in order to achieve its declared objective, and moreover that that objective could not be achieved by restrictions that are less extensive or less disruptive of trade within the European Union."
Legal certainty and legitimate expectation were also satisfied, since the Government had made its intention clear since December 2010. "I am not therefore persuaded that an individual participating in a non-employment-based loan scheme between 2011 and 2017 had a legitimate expectation that loans that he or she received would not, by one means or another, be held to be chargeable to income tax."
Lord Tyre also accepted HMRC's argument "that the loan charge is not properly to be characterised as a penalty for the purposes of application of EU law rights. As was submitted, it is a charge to income tax on sums received by taxpayers such as the petitioner in consideration of the provision of service or services, which sums have not otherwise borne income tax... The issue of whether a loan upon which the charge has been paid could also be subject to a demand for repayment, whether by the original lender or by an assignee, seems to me to be one which lies between any taxpayer in that position and the scheme promoter responsible for devising the terms of the loan".
For all these reasons he dismissed the petition.