Contractor tax avoidance scheme defeated
After two failed judicial review challenges and the Supreme Court’s refusal to grant appeals against the Court of Appeal’s judgements, and also failing to impress the European Court of Human Rights, the Montpelier tax avoidance scheme was finally defeated at the First Tier Tax Tribunal.
Over 2,000 people, the majority of which were IT contractors and property developers , used the scheme and who will now collectively owe the tax man up to £200 million.
Robert Huitson, who took the appeal to the Tribunal, was an electrical engineering consultant resident in the UK. In April 2001 he entered into a tax avoidance scheme marketed by a firm of tax consultants called Montpelier Tax Consultants (Isle of Man) Limited. The scheme involved setting up an Isle of Man trust of which Mr Huitson was the settlor and in which he had an interest in possession, or a right to income. The trust became a partner in an Isle of Man partnership which in turn entered into a contract with Mr Huitson to provide his services. Under his contract with the partnership Mr Huitson was entitled to an annual fee of £15,000. He was also entitled to a share of the partnership profits as a beneficiary under the trust.
If the Scheme operated as Montpelier intended, Mr Huitson would pay income tax and national insurance on his annual fee of £15,000. However he would pay no income tax or national insurance on sums paid to him as beneficiary of the trust. The scheme purported to exploit the terms of the UK – Isle of Man Double Taxation Arrangements.
Finance Act 2008 however introduced retrospective legislation which provided that a partner in the relevant circumstances would be liable to income tax despite the existence of double taxation arrangements.
Scheme arrangements
In June 2001, Mr Huitson paid £1,000 to an Isle of Man company called Crackington Ltd to establish the Robert Huitson Family Settlement (the Trust). Crackington was the trustee and Huitson, as a beneficiary, was entitled to income of the Trust during his lifetime.
Crackington entered into partnership with four other Isle of Man companies in December 2001. Each one of those companies were also trustees of Isle of Man trusts set up by other participants of the avoidance scheme. The partnership was known as the “Allenby Partnership”, of which Montpelier was the “Managing Partner”.
In August 2001 the Allenby Partnership entered into a contract for services with Mr Huitson under which he agreed to provide electrical engineering consultancy services and advice, and to develop electrical engineering IT. Mr Huitson contracted to work at least 1,200 hours per year. Under that contract he received a fixed fee of £15,000 per annum.
The intended effect of the Scheme was that Huitson would be treated as being entitled to the partnership profits as if he were a partner in the Allenby Partnership. They were the commercial profits of an Isle of Man enterprise and as such were not subject to UK tax. At the same time, the Isle of Man would not tax Mr Huitson on income from the trust because he was not resident in the Isle of Man. In the words of judge Kenneth Parker, the Scheme would “appear to realise every taxpayer’s dream of lawfully avoiding, or at least greatly reducing, income tax in any jurisdiction”. In the case of Mr Huitson the effective rate of tax he would suffer on his income would be approximately 3.5%.
HMRC become aware of the Scheme by July 2002 and enquiries into Mr Huitson’s tax returns were opened together with enquiries into the returns of other clients of Montpelier who had used the Scheme.
The enquiry into the 2001-02 return commenced on 4 December 2003. On 16 May 2007 HMRC wrote to Mr Huitson and the other clients stating that they did not accept the claims to relief and that representative cases were being taken to the Special Commissioners. In February 2008 HMRC wrote to Montpelier stating that the Scheme was caught for tax.
Having lost his appeal at Tribunal, Mr Huitson now faces a a combined tax, NIC and interest bill of around £195,000 for the six years ended 5th April 2007.
This is an outrage and a disgusting abuse of power.
Who cares if we pay 3.5% tax, we contribute to the economy in many other ways. Unlike dole scum and the lazy tossers in the public sector (How much does a teacher or nurse pay in VAT compared to the likes of us?)
Although my portfolio will take a hist at least i’m in the lucky position to sell a couple of BTL investments to cover this but I know of others who stand to lose their house.
And for everybody else who pays the “right amount” of tax, then don’t come crying when they retrospectively decide ISAs are illegal and make you pay it all back in 10 years. WITH INTEREST !!!!
This is an abuse of human rights pure and simple and there is absolutley no place for this immoral behaviour in a civilized society.
What an arrogant and spiteful response from yachtsman
Who cares if you have to sell some of your BTL investments or others lose their house if they have been sailing too close to the wind regarding tax. I certainly don’t.
And, btw, I am a contractor.
Pull the other one mate. You’re clearly jealous permie scum. Anyway, like I said, I don’t care personally, I own a property portfolio and I stand to lose only around 10%.
Do you have an ISA? If so, then you’re also a tax avoider and I hope the government retrospectively asks you and your lazy mates in the public sector to pay it all back WITH INTEREST AND PENALITIES!
I’ve been an IT contractor for over 20 years and I can safely say this country has gone to the dogs. Why should a vase chunk of the fruits of my hard labour be paid out to those who can’t even be bothered getting a job or to fund some stupid government initiative. . I earned the money so I should decide how it’s spent.
“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.” Lord Clyde.
Following this abhorrent ruling II shall be taking myself and the taxes I pay to another country where entrepreneurs are not penalised for their contribution to the economy.
Basically what I can gather from most of these posts is that if you work you shouldn’t have to pay tax, forgive me but who will pay for the NHS, roads etc. and like Geoff I’m a contractor too. I agree whole heartedly with Geoff’s comments.
Another jealous permit fool.
I pay for private health insurance and my kids go to a private school. Why should I pay twice? Only the sheeple pay tax and are too stupid or lazy to arrange their financial affairs in guessing you’re one. It’s unfair that those, like me, who are quite happy looking after themselves are penalised in this abhorrent manner.
Anyway, the battle isn’t over just yet. There’s a group I belong to who are working on defeating this and it looks like they’ stand a very good chance.
I have to say that it does look like public sector workers are posting on here.
Retrospective legislation can only be wrong, the state has to bear responsibility for its legislative errors, just as it takes reward for its legislative errors.
I feel that 30 years ago, our legislators were the most intelligent people in the country, I now feel they are 12 year olds.
We are in this mess – by the way, out country is worse than bankrupt – its just a matter of time before we pay the price – because of stupid government spending, tax avoidance does not even contribute 1% to the crippling debt we are in.
The UK is a mess, all of its civil service departments have been hijacked, by the people that work for them, for the people that work for them, with no regard to any service. Free speech has been taken away and i find that offensive to all our forefathers who fought in wars to safeguard such liberties.
And don’t start me on civil service pensions – the main cause of our debt – let ex civil servants live retired life in luxury while all but the wealthy get naff all. What a STATE
It never ceases to amaze me how many tax dodging contractors still believe they did nothing wrong by joining these avoidance schemes.
Paying little to no tax but still expecting to use public services is a downright disgrace.
The argument of ‘I pay for private medical care’ and ‘I send my kids to private school’ does not hold up. These are your choices. You chose to pay for these extra services.
I suppose in your world no-one would pay taxes and only the rich would be allowed access to education and healthcare.
Grow up and pay up like everyone else !
While I was contracting I used one of these schemes for a (thankfully) short time.
I only considered this due to the changes brought about by IR35. Essentially a piece of legislation designed to milk one man bands like myself while leaving the privileges of ‘ordinary’ Tory voting company directors intact.
I and I suspect very many others would NEVER have considered any avoidance scheme had it not been for IR35.
I used the scheme from 2005 – 2006. Fast forward 10 years and all of a sudden HMRC decide that the tax planning involved is “obviously ineffective”. If it was that obvious why did they wait ten years to do anything about it?
Why did they allow these schemes to be marketed in the first place if they were “obviously ineffective”?
To add insult to injury, very similar schemes continue to be marketed to this day.
Does anyone know what happened to the de Graaf Resources Ltd IOM scheme ? Do they still exist as an organisation ? Has their scheme been decided in the courts ?
Roger, How have things evolved in relation to the “de Graaf Resources Ltd IOM scheme”?
Have you been able to contact them?
It’s kind of important that we can count on the rules not changing retrospectively, otherwise how can one ever know what is correct. We live in a competitive society, so we need to have rules we can count on; including the rule that rules don’t change retrospectively.