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Contractor loses case against retrospective offshore tax claim

Published on Jan 28, 2010 |

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Hundreds of contractors who have used offshore tax schemes could now be liable for millions in unpaid taxes, after the High Court ruled that HMRC could close a tax avoidance loophole retrospectively.

For seven years, IT contractor Robert Huitson used a complicated offshore tax scheme marketed by Montpelier Tax Consultants (Isle of Man), and saved himself £85k in taxes he would have been liable for if he had been a 'normal' UK taxpayer.

Huitson claimed that HMRC had no right to tax him retrospectively, but Mr Justice Kenneth Parker disagreed and found that HMRC were entitled to close the loophole which Montpelier, and other schemes had exploited for a number of years.

Anti-avoidance legislation, which was introduced via the 2008 Finance Act, also allows the Government to take retrospective action against certain offshore structures.

Budget Note BN66, issued in March 2008, targeted tax schemes which exploited a loophole in the double taxation treaty between the UK and the Isle of Man.

From 2001, Montpelier set up a complex systems of trusts and partnerships via which contractors performed their work. The majority of the income was passed through family trusts, which avoided income tax in either the UK or the Isle of Man.

The court heard that, for seven years, Huitson avoided income tax of £84,980 - reducing his effective tax rate to a mere 3.5%. There are believed to be over 2,000 other taxpayers who are liable to pay back taxes as a result of using similar schemes.

The judge pointed out that HMRC had warned participants in such offshore schemes that they might be challenged, and that the backdating of tax demands did not breach human rights and was "in the relevant circumstances proportionate".

You can read more background in our overview of BN66.