HMRC defeats tax avoidance scheme over DTA misuse
A tax avoidance scheme which exploited the UK’s double-taxation agreement with the Isle of Man has been defeated by HM Revenue & Customs.
More than 2,000 people signed up to the Isle of Man-based scheme to reduce their rate of income tax to less than 5%.
The users of the scheme, marketed by Isle of Man-based firm Montpelier Tax Consultants, now collectively owe HMRC £200m (€271m, $303m) after being beaten at Tribunal.
Retrospective
The avoidance scheme was predominantly used by property developers and IT contractors between 2001 and 2008 before being blocked by anti-avoidance legislation in the Finance Act 2008, a law which can be applied retrospectively.
A scheme user, UK-based electrical consultant Robert Huitson, challenged the amended legislation, taking the case to Tribunal.
Similar to the thousands of other scheme users, Huitson established a trust and entered into a partnership with an Isle of Man-based enterprise, in this instance Allenby Partnership, where he was contracted to provide electrical engineering services.
Under the double taxation agreement (DTA), an Isle of Man enterprise is not subject to UK tax on income unless the enterprise is engaged in trade or business on a permanent basis in the UK.
Human rights
Allenby Partnership had no permanent base in the UK and, given that Huitson was entitled to the partnership profits, he was therefore not subject to UK tax.
However, at the same time Huitson was not taxed by the Isle of Man because he was not resident there, meaning he avoided paying tax in any jurisdiction.
He started judicial review proceedings to challenge the retrospective legislation on the grounds that the new law infringed his human rights. The legislation was challenged by another judicial review, which also failed.
In February 2012, the Supreme Court refused an application to hear appeals against the Court of Appeal’s judgments in these two cases.
Wholly artificial
The court documents pointed out that, while Huitson’s is not a lead case, “there are other taxpayers who are in the same position as Mr Huitson, including clients of Montpelier and clients of other advisers”.
Judge Kenneth Parker said parliament was entitled to introduce retrospective legislation to prevent taxpayers from exploiting the DTA and using “wholly artificial arrangements”.
By amending the legislation, he said, parliament had achieved a fair balance between Huitson’s human rights and the public interest in preventing tax avoidance.
