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BN66 – an overview of the offshore tax avoidance rules

In the March 2008 Budget, the Chancellor announced a crackdown on the ‘abuse’ of loopholes in the double taxation treaties which exist between the UK and other countries.

Prior to 2008, a number of tax avoidance schemes had been established to enable contractors, and other UK workers to pay income tax in the Isle of Man (and other locations), whilst working and living in the UK.

Over the years, a number of offshore schemes have reduced contractors’ tax liabilities using complex structures based on the Isle of Man, Guernsey and other locations. Such arrangements will typically be in the form of a ‘partnership’ or ‘trust’ whereby a contractor (or other individuals) can live and work in the UK, but pay much-reduced tax by virtue of the double taxation treaties which exist between the UK and the offshore location.

Budget Note 66 – BN66

Budget Note 66 (BN66) sought to clarify the Government’s intentions on the matter, summed up by the following extracts:

“UK residents are taxable on their income wherever it arises. A wholly artificial scheme seeks to avoid UK tax by artificially diverting income of a UK resident individual to a foreign partnership comprised of foreign trustees.”

“If you would have been liable to UK tax and NICs had you been employed directly by the client, you must pay UK tax and NICs under these rules, whether or not your service company is located in the UK.”

The two main aims of the measures outlined in ‘BN66’ are to:

1. clarify, retrospectively, legislation introduced in 1987, so that it has effect as intended, i.e. that UK residents pay UK tax on their profits from foreign partnerships; and

2. to prevent tax avoidance through the misuse of Double Taxation Treaties by UK residents.

The new BN66 rules to outlaw the abuse of double taxation arrangements came into effect via the Finance Act 2008 (Section 58).

The Montpelier / Robert Huitson case

In a landmark hearing at the High Court on January 28th 2010, it was ruled that HMRC could legally claim for backdated taxes retrospectively, following a claim by IT contractor Robert Huitson

For seven years, Huitson had used a complicated Isle of Man offshore tax vehicle, run by Montpelier Tax Consultants. He saved himself around £85,000 in taxes over the period, reducing his effective income tax rate to just 3.5%.

Huitson claimed that HMRC could not retrospectively tax him for income received before the 2008 Finance Act became law, however, Mr Justice Kenneth Parker disagreed, which means that an estimated 2 to 3,000 people who have used such schemes in the past may be pursued for significant sums of backdated tax, interest, and penalties.

At the hearing, the judge pointed out that HMRC had already warned participants in offshore schemes that they may be liable to further taxation, and that the backdating of tax demands did not breach human rights as it was “in the relevant circumstances proportionate”.

Huitson Appeal – July 2011

In November 2010, offshore scheme provider Montpelier was granted a Court of Appeal hearing to contest Justice Parker’s original findings.

However, in the judgement which was handed down in July 2011, Lord Justices Mummery, Sullivan and Tomlinson found no reason to overturn the original ruling.

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Last updated: 16th June 2019