Brexit donations - a retrospective change in the law?

Introduction

Some of you may have read my blog over the Christmas period in which I discussed the inheritance tax (‘IHT’) charge that HMRC have (correctly, in my opinion) tried to enforce against donors who provided significant donations to either Leave or Remain campaigns. I won’t repeat the full arguments here but to recap: where a gift to either campaign was made that exceeded the donor’s nil rate band (currently £325,000), the law demands that there is an immediate charge to IHT at 20% on the amount that exceeds the nil rate band.

I understand that this liability to tax affects more Leave donors than Remain donors as a result of the fact that more wealthy individuals donated to Leave than donated to Remain. Remain donations were more likely to be funded by companies, which do not pay IHT, or lower value individual donations that are not caught by the IHT charge.

A new tax break to help us all?

On the 18 January 2018 the following Members of Parliament moved to retrospectively change the law so that donors to both campaigns would no longer be liable to this IHT charge by suggesting an amendment to the Finance (No.2) Bill 2018 (see https://publications.parliament.uk/pa/bills/cbill/2017-2019/0151/amend/finance2_rm_rep_0118.1-3.html).

The MPs, their parties and their campaign status in the 2015 referendum are as follows:

As you can see, support for the amendment comes from MPs across the House. What is curious, however, is that Liberal Democrat and Labour MPs are supporting a retrospective change in the law which, in essence, means that extremely wealthy individuals will not have to pay tax that, under the current law, they should rightly be paying.

It is not surprising that the Conservative Party may be willing to support IHT tax breaks as this is consistent with their recent introduction of the main residence nil rate band, however, the proposed legislation is not necessarily consistent with Liberal Democrat and Labour policy.

Liberal Democrat and Labour tax policy

On the Liberal Democrats’ website, one of the party’s stated commitments is to ‘Fair taxes’ [1]. In particular, they would seek to “Ensure those with the highest incomes and wealth are making a fair contribution”. There is also specific reference to the “Conservatives’ unfair and unjustified tax cuts, including… the raising of the Inheritance Tax Threshold”.

I am interested to understand how Alistair Carmichael reconciles his position to support legislation which provides an inheritance tax break to wealthy individuals with the stated Liberal Democrat policy of ensuring that those on the “highest incomes… make a fair contribution”.

If we look at the Labour Party manifesto [2] (with its subheading “For the many, Not for the Few”). The manifesto does not directly mention IHT. However, the overriding theme is again ‘fairness’ in taxation:

“We will stop our financial system being rigged for the few…

"We believe in the social obligation to contribute to a fair taxation scheme for the common good. We will take on the social scourge of tax avoidance through our Tax Transparency and Enforcement Programme, and close down tax loopholes.”

By advocating the proposed tax break, these Labour MPs are essentially attempting to ‘rig’ the system for the few. They may advocate ‘closing down tax loopholes’ but at the same time they are offering a tax break to a small number of people who can afford to give away over £325,000 to a political campaign. I am not convinced that this sits comfortably with either party’s focus on ‘fairness’.

The suggested amendment

The proposed amendment will add a sub-section to section 24 IHTA 1984 (which exempts gifts to political parties from the IHT charge). Subsection 2A, as currently drafted, reads as follows:

“2A A referendum campaign qualifies under this section if it was designated by the Electoral Commission as a permitted participant in a referendum within the meaning of—

(a) Part 7 of the Political Parties, Elections and Referendums Act 2000,

(b) paragraph 2 of Schedule 4 to the Scottish Independence Referendum Act 2014,

(c) Part 7 of the Act Political Parties, Elections and Referendums Act 2000 as modified in its application by Schedule 1 to the European Union Referendum Act 2015 “

A change in the law to allow for future donations to similar referendum campaigns to be exempt from the IHT charge would not be hugely controversial. Parliament frequently changes laws. Whilst we may not like this tax give away to the extremely wealthy, it is not unreasonable for Parliament to change the law with respect to the future. But here is the astonishing part of the amendment:

“The changes made by sub-section 2 and 3 are to be regarded as always having had effect”.

If this section is passed into law, HMRC will be obliged to treat what are currently taxable gifts to referendum campaigns as always having been free of IHT, despite the original drafters of this legislation (some 34 years ago) never intending this to be the case. I have no objection to Parliament changing the law for future campaigns, but what is objectionable is to see MPs changing the law retrospectively to enable a small number of wealthy individuals who are currently liable to pay tax on their donations escape that liability. This proposal has no benefit to the wider UK population.

Can Parliament change the law with retrospective effect?

Ex post facto law is controversial. Some jurisdictions do not allow ‘retrospective’ laws. The United Kingdom is not one of those jurisdictions. Under the doctrine of Parliamentary Sovereignty, Parliament is allowed to pass any law it wishes. If Parliament wishes to change the law retrospectively then it can. The only example (that I can find) of laws that are precluded from being changed retrospectively are criminal laws. Article 7 of the European Convention on Human Rights (‘ECHR’) (‘No punishment without law’) prevents the UK from changing criminal law retrospectively. If the ECHR does bind Parliament, then perhaps the next campaign will be for the withdrawal of the UK from the ECHR. After all, who needs progress and experts?

Conclusion

It is within Parliament’s power to change the law retrospectively to exempt high value donations to the Leave and Remain campaigns from the charge to IHT. Given the current squeeze on public resources and the fact that this law will only benefit a very small number of very wealthy people, in my view it would nevertheless be distasteful. It would give the impression that the ‘establishment’ looks after itself. There is a theory that a number of people voted “Leave” in order to make an anti-establishment statement, because they felt disenfranchised: the elite looking after themselves to the detriment of the working man. It seems some of our politicians have not learnt that lesson.

[1] https://www.libdems.org.uk/economy#

[2] https://labour.org.uk/manifesto/creating-economy-works/#second