HMRC wins offshore case

Date: 31 January 2010

Contractors who have used offshore trust vehicles to reduce the tax they pay will need to think again. Fast!

The tax authorities have won a court ruling allowing them to claw back millions of pounds in backdated tax from people who used an offshore tax avoidance scheme. It is thought there may be 2,500 taxpayers exploiting similar arrangements, with about £100m of income tax at stake.

The High Court dismissed an application for a judicial review in the case of a self-employed IT contractor who challenged a £100,000 backdated tax demand from HMRC. Mr Justice Kenneth Parker ruled that the backdating of the demand did not breach human rights law.

The case centres on self-employed IT contractor Robert Huitson, who started using a scheme set up by Montpelier Tax Consultants in 2001. This arrangement allowed him to receive an annual fee of £15,000, plus a further sum, in his capacity as the owner of a life interest in an offshore trust.

However, the government cracked down on this type of scheme following legislation introduced in the 2008 Finance Act that also allowed them to take retrospective action. 

The judge found that, by exploiting the arrangements, Mr Huitson, who was not resident in the Isle of Man, avoided income tax of £84,980 over seven years and reduced his effective tax rate to 3.5 per cent. 

The court was told during earlier hearings that 57 other people making use of the scheme could not meet tax demands even if they were to sell assets including family homes.

It was also told that 29 scheme users could only settle if they sold or re-mortgaged their home. Several people faced bankruptcy "and the related financial worry has caused mental health problems and marital breakdown".

The judge found that "such elaborate arrangements would not have been entered into other than for the purpose of tax avoidance . . . the arrangements can therefore correctly be described as artificial". 

He added: "It is also immediately plain that the tax avoidance scheme, if it worked, would be singularly attractive to any person in the position of the claimant, that is any resident of the UK who, as a self-employed person, carried on a trade or profession here."

Dismissing the application for a judicial review, he said that such a tax avoidance scheme "could be expected to have a significant bandwagon effect". He added: "I note that HMRC intends to take into account financial hardship to taxpayers before seeking to enforce demands for tax and interest in respect of past periods."

My Accountant Friend says, "Please be very careful of using offshore trust companies for the purpose of reducing your tax bill. While paying much lower tax is obviously attractive the risks and potential penalties are not worth it."