Offshore tax avoiders face £100m tax bill

Some of the taxpayers may now be driven into bankruptcy, it was claimed

The High Court has upheld the right of HM Revenue & Customs to seek £100m in income taxes from 2,500 users of an offshore tax avoidance scheme.

A self-employed IT consultant, Robert Huitson, had challenged the Revenue's right to levy taxes retrospectively.

He had avoided £85,000 of income tax over seven years via a complicated tax arrangement based in the Isle of Man.

Mr Justice Parker upheld the 2008 Finance Act which let the Revenue plug the loophole retrospectively.

'Every taxpayer's dream'

Mr Huitson's barrister said that this broke his rights under the Human Rights Act of 2008.

He argued that until 2008, Mr Huitson's tax affairs had been legal, and that this was shown by the fact that the Revenue had failed to take any action against them before the law was changed, despite being well aware of them.

Mr Justice Parker rejected this.

He pointed out that the Revenue had warned the users of the tax avoidance scheme that it might be challenged, and he said the government was entitled to change tax law retrospectively to squash artificial arrangements.

"The tax avoidance scheme, if it worked, would, therefore, appear to realise every taxpayer's dream of lawfully avoiding, or at least greatly reducing, income tax in any jurisdiction," he said.

"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," the judge added.

The solicitors for Mr Huitson said they intended to appeal.

Tax at 3.5%

The case hinged on a tax avoidance scheme marketed by a firm of tax consultants in the Isle of Man called Montpelier.

I think all tax practitioners will worry a bit about this judgement if it is seen as opening the door to retrospection John Whiting, CIOT

They set up a complicated set of partnerships and trusts through which UK business contractors or consultants could channel their work to their customers, and also receive their income.

The fact that most of the income eventually came via a family trust meant that no income tax was paid on it, either in the UK or the Isle of Man.

The judge said that the overall effect had been to reduce Mr Huitson's tax rate to just 3.5%.

"Until the relevant legislation was amended with retrospective effect, the claimant contended that, as a result of the double taxation arrangement and the legislation then applicable, the income channelled through the trust was not subject to UK income tax," said Mr Justice Parker.

"Indeed, it did not appear that it was even subject to tax in the Isle of Man because, although the trustee was resident there, the relevant income belonged, through the interest in possession in the trust, to a person, the claimant, who was not resident in the Isle of Man."

The existence of the tax avoidance scheme has been well known in the accountancy industry and several other versions marketed by other firms are now thought to be under threat.

"I think all tax practitioners will worry a bit about this judgement if it is seen as opening the door to retrospection," said John Whiting of the Chartered Institute of Taxation (CIOT).

Bankrupt

It was claimed at the High Court hearings that a victory for the Revenue would lead some of the users of the Montpelier scheme into bankruptcy.

"Fifty-seven other scheme users cannot meet the tax demand, even if they were to sell all of their assets including their family home," Mr Huitson's barrister claimed, drawing on a small survey of the scheme's users.

"Twenty-nine scheme users could only settle by selling or re-mortgaging their family home," he added.

The judge said the HMRC would take financial hardship into account when levying tax.

But he pointed out that it also needed to be fair to those people who had paid their taxes on account or had put money aside in case they eventually had to pay up, and who had not spent their money on day-to-day living or on investments they would find it hard to cash in.

He also said that fairness meant taking into account "the great body of UK resident taxpayers who steered clear of such arrangements".

A website forum for users of the Montpelier scheme contains claims from one person who says she now faces paying £300,000 in back taxes.

Ronnie Ludwig, of accountants Saffery Champness, said the High Court ruling meant that users of other "off the shelf" tax avoidance schemes could no longer sleep easily.

"Since the Revenue started demanding that all such schemes be reported to them the vast majority have effectively become dead in the water - they have huge risks," he said.