Unprecedented Court Ruling Smashes Offshore Tax Schemes

10/2/2010

Thousands of contractors have been found to collectively owe HMRC £millions in unpaid taxes. In what was described as a ‘bandwagon effect', a large number of contractors used an offshore scheme provided by Montpelier on the Isle of Man to channel their UK incomes through overseas trusts at a taxable rate of 3.5%.

On the 28^th of January, HMRC won a landmark case against IT Contractor Robert Huitson (and by proxy other individuals who had used the same scheme or variants of it) whom the high court ruled owed HMRC £80,000 in taxes and interest.

HMRC introduced anti-avoidance legislation in the Finance Act in March 2008 via Budget Note 66 (BN66) with retrospective effect. These retrospective powers are unprecedented in UK tax legislation and were successfully tested for the first time in this case. While HMRC have previously closed loop holes and identified avoidance schemes, they have never before been able to claw back taxes which went unpaid prior to the scheme being ruled illegal.

Mr. Huitson's council had argued that the retrospective nature of HMRC's claim breached his client's human rights. But the judge Mr. Justice Parker rejected this, pointing out that despite long inaction HMRC had warned users of the scheme that it might be challenged and recommended that they pay the tax deemed properly due. He considered the unfair advantage that a contractor effectively paying just 3.5% income tax had over another paying full taxes and sided with HMRC, stating;

"HMRC submits - and this did not appear to be seriously disputed by...[Huitson's lawyer] - that such elaborate arrangements would not have been entered into other than for the purpose of tax avoidance. The arrangements had no genuine commercial purpose."

Some contractors may now face tax liabilities in excess of £100,000. The Montpelier scheme was used by for contractors for a number of years. HMRC can investigate users of this schemes  going back 6 years. This could mean HMRC clawing back over £100 Million in taxes and interest. Mr. Huitson's council has indicated that he will appeal the decision. Mr Justice Parker ruled out hearing any appeal, leaving the court of appeal the remaining option.

planIT's Managing Director, Adrian Learer FCA commented, "I have sympathy for those contractors who have been caught out by this ruling, many of whom now face bankruptcy. The provider who marketed the scheme as compliant and in part HMRC who allowed the scheme to go on too long created a situation where the debt via these new retrospective powers has become crippling. HMRC have slammed the door shut on overseas tax avoidance schemes with this victory. Any offshore arrangements where there is no genuine commercial purpose apart from reducing tax are now putting users at huge financial risk. Contractors using such schemes should immediately seek advice from professional Chartered Accountants."