Tax avoidance contractors face £200m bill after Tribunal ruling

Thousands of contractors face enormous tax bills after a Tribunal ruled that HMRC could retrospectively tax an Isle of Man based tax avoidance scheme, despite its structure being legal at the time of operation.

The First-tier Tribunal (Tax) released its ruling earlier this month on an appeal case – the latest in a long-running series of cases involving contractor Robert Huitson, and HMRC. HMRC claims that Huitson owes £200,000 in unpaid taxes, following a retrospective change in the law made by the Government seven years ago.

How did this contractor tax avoidance scheme operate?

In 2001, Robert Huitson, an electrical consultant, entered into an arrangement with Montpelier Tax Consultants, a tax avoidance vehicle based on the Isle of Man. This was one of a number of tax-saving schemes marketed to contractors at the time.

Users of the Scheme were entitled to a right to income from an offshore trust.

The trust became a partner in an Isle of Man partnership which subsequently entered into a contract with Huitson to provide his consultancy services.

Huitson received an annual fee of £15,000 for his services and was entitled to a share of partnership profits.

According to the Tribunal documents, Huitson would pay UK tax and NICs on his £15,000 annual fee, but nothing on his share of the partnership’s profits, as the Scheme attempted to exploit the terms of the UK – Isle of Man Double Taxation Arrangements.

In February 2008, HMRC wrote to Montpelier advising its directors that the Scheme was caught by Section 858 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Under the terms of the Act (as it was), any partners in such schemes are liable to pay UK income tax on their share of the profits.

Controversially, on 12 March 2008, the Government amended s.858 of the Act to expand the reach of the legislation to include anyone “entitled to a share of income or capital gains of the partnership”, not just the partners themselves.

So, the Government had retrospectively amended rules which didn’t exist at the time when Huitson was using the Montpelier Scheme.

Huitson failed in several subsequent legal bids to overturn the Government’s actions, claiming that it was unlawful to change tax legislation retrospectively. Prior to this Tax Tribunal appeal, he made an unsuccessful application to the European Court of Human Rights, on top of two earlier failed judicial reviews.

What does this latest ruling mean?

In his Judgement following the Tribunal hearing, which took place in February 2015, Judge Jonathan Cannan ruled as follows:

“In the light of the legislative history, and giving the provision a purposive construction, we are satisfied that the Scheme is caught by s 858. Mr Huitson is to be treated as a member of the Allenby Partnership in all the relevant tax years because he was entitled to a share of the income of the partnership.”

Huitson himself owes around £195,000 in unpaid tax, NICs and interest on all earnings he derived from the Scheme from 2001 to 2007.

There are believed to be several thousand other former clients of the Montpelier scheme (including many contractors), who owe around £200m to HMRC in unpaid taxes between them.

What’s worrying for users of such schemes is the recent introduction new rules which place the burden of proof on taxpayers when faced with an Accelerated Payment Notice (APN). Users of schemes under investigation will now have to pay any unpaid taxes within 90 days, even before a decision has been made on their cases.

Further Information

You can read the full judgement here.