By Claire West

A discussion paper published last week by the Chartered Institute Of Taxation (CIOT) warns that the use of retrospective changes to the UK's tax rules damages confidence in the tax system, with the risk of consequent harm to the British economy.

CIOT President Vincent Oratore said:

"In recent years we have seen increasing use of retrospective action in the tax system. Thankfully this is still relatively rare but we think it is important for the government to state clearly when, if at all, it will see retrospective action as valid. It must be very sparingly used: retrospection is damaging to confidence in the tax system as it undermines the principles of stability and certainty. In an internationally competitive world, frequent retrospection would reduce the attractiveness of the UK to potential inbound investors."

The CIOT argues that certainty about the tax people will pay when they act in a particular way is one of the most important elements of a good tax system. The CIOT's paper states:

. The fundamental principle is that taxpayers should be taxed on the wording of the legislation in place at the time of their actions. To do otherwise is to damage the fundamental principle of certainty, something that should be at a cornerstone of any tax system.

. The Government should make a clear statement of when, if at all, it sees retrospection as appropriate. The Institute believes that this statement should be part of a new protocol on announcing legislative changes taking immediate effect outside fiscal events, proposed by the Government in their recent Government's Tax Policy Making consultation paper.

. The CIOT is not opposed to retrospective action in all circumstances but believes it is something "that should be used with extreme care and justified at length." The Institute argues that use of retrospection by the Government should always have to be justified by the Government in Parliament.

. The Government should adopt a general principle that includes a presumption against retrospection. That said, this principle could set out certain very limited circumstances where the Government could make the argument that retrospection can be used because it is considered necessary (rather than desirable)