HMRC secures victory in £200m double taxation loophole scam trial
HM Revenue & Customs (HMRC) has defeated a £200 million tax avoidance scheme that took advantage of the UK’s double taxation agreement with the Isle of Man.
The scheme exploited the UK’s double taxation agreement with the Isle of Man, whereby people are not taxed twice on the same income in the UK and the Isle of Man.
People who took advantage of the arrangement believed it would reduce their rate of income tax to less than 5%.
Over 2,000 people signed up the scheme between 2001 and 2008, the majority of whom were property developers and IT contractors. The scheme was blocked by anti-avoidance legislation in the Finance Act 2008, which clarified the rules around double taxation agreements.
The legislation was applied retrospectively to members of such schemes.
Following HMRC’s victory in the tribunal, scheme members now owe it up to £200 million in unpaid tax.
The case was brought to the tribunal by one of the scheme’s users, Robert Huitson.
He previously took HMRC to a judicial review, which failed. In February 2012, the Supreme Court refused to hear appeals against the Court of Appeal’s judgement.
Huitson subsequently failed to have the case heard in the European Court of Human Rights this February.
The scheme was promoted by Montpelier Tax Consultants. It involved setting up an Isle of Man trust in which the individual in the scheme was a beneficiary. This allowed entitled the individual to receive income from the trust.
The trust would then become a partner in an Isle of Man partnership, which entered a contract with individuals to provide services. Under the contract, members were entitled to an annual fee, which they would pay income tax and national insurance on. However, they also received a share of the partnership profits as a beneficiary under the trust, which they did not pay income tax or national insurance on.
In Huitson’s case, he received an annual fee of £15,000 which he paid income tax and national insurance on. He did not pay tax on other income in the trust between 2001 and 2008. As a result he avoided paying an estimated £195,000.
The scheme used a loophole in the law which allowed partnerships in countries with a double taxation agreement with the UK to be treated as an individual ‘person’ rather than a company. This meant that the taxpayer could avoid paying tax by claiming they were entitled to the profits from the Trust.
The tribunal found in favour of HMRC, and said Huitson was subject to retrospective rules set out by the 2008 Finance Act.
Jim Harra, HMRC’s director general of business tax, said the scheme was unfair on people who paid their share of tax.
‘This is yet another example where some people try to abuse the tax system to deprive the UK of money for vital public services. This is unfair on the majority who pay their fair share,’ he said.
