Retrospective legislation will stand
A proposed amendment to abolish the retrospective nature application of S.58(4) Finance Act 2008 (UK residents and foreign partnerships), commonly referred to as BN66, has been unsuccessful following the Public Bill Committee review.
Budget Note 66 (BN66) was announced in March 2008 by the then Labour government to stop the abuse of double taxation agreements. BN66 sought to “clarify” and “put beyond doubt” legislation that had been in place since 1987. The true effects of S.58 were however to render any use of avoidance schemes that involved double taxation treaty planning arrangements as illegal regardless of the time they were entered into.
When the legislation was enacted it received widespread criticism from both the freelancing community and tax professional bodies because it flew in the face of long standing practice, known as the Rees rules, that any change in taxation usually takes effect from the date of announcement or some time after.
As a consequence of HMRC's retrospective use of S.58 around 2,200 contractors have been presented with sizeable back dated tax demands which include interest and penalties as a result of their participation in, what they later discovered to be, a wholly artificial scheme. A constituent of Brooks Newmark, Conservative MP for Braintree, had told his MP that he was facing tax arrears, including accrued interest, in excess of £200,000, which would inevitably mean losing his family home and being made bankrupt. His livelihood would be ruined.
Those who used the scheme paid an effective rate of tax of 5% on their earned income as liabilities were minimised through the use of offshore trusts and double taxation treaties and involved an Isle of Man partnership.
Steve Baker, Conservative MP for Wycombe, and former IT contractor tabled the amendment which proposed the words included in the legislation, “always having had effect” be replaced with “having effect from 12th March 2008”, thereby annulling retrospection. Mr Baker argued that if the new clause was not agreed then the effect would be “to expose people to financial ruin at the hands of the state for conduct that they genuinely thought was lawful at the time.”
Mr Baker told the committee that a fundamental point of law was at stake and that the rule of law should avoid 'tyranny'. Tyranny, he said, “is when the sand shifts under someone's feet and conduct they thought lawful is suddenly punished.” Baker described what was happening to those affected contractors as a “hallmark of despotism.”
Nigel Mills, Conservative MP for Amber Valley, agreed with Mr Baker, stating, “it is not right to use the power of the state in a draconian way to turn back time and pretend the scheme had been closed down at the start.” Mr Mills described HMRC's failure to head off the avoidance scheme whilst it was in its infancy as “a terrible error or judgment.”
When Labour introduced the legislation, David Gauke had opposed and challenged it but now the Exchequer Secretary to the Treasury has had a change of heart and believes that the Government “must reserve the right to use retrospection in wholly exceptional circumstances.” No doubt Mr Gauke's opinion has been altered by the fact that his department stands to lose between £200 – 230 million of tax if the legislation were to be altered.
Attempts to block this piece of retrospective have now failed in the High Court, the Court of Appeal and an application for the case to be heard in the Supreme Court was also rejected. Despite this , the lobby group, 'No To Retro Tax' (NTRT) believe there is still an opportunity to mount further challenge at the Report Stage of the Bill or in subsequent legislation.
NTRT who have done sterling work, are, deluding themselves.
Their 2 bites of the Amendment process have been withdrawn in Committee. They never even got to a vote. Do they seriously think a 3rd or 4th attempt will be any better?
I dont see what NTRT Whitehouse’s and strategy is here. Maybe its to drag the process out for as longas possible to delay the inevitable?
All the political and legislative avenues appear exhausted.
Good luck to them but frankly, their strategy looks a busted flush.
Can we get some facts straight here.
“Those who used the scheme paid an effective rate of tax of 5% on their earned income”
This is simply not true. The scheme users paid a fixed fee to the providers and on average this was about 3.5% of unearned income, in some cases it was 5%, in some cases it was less then 0.1%.
The important thing to note is that they paid NO TAX whatsoever to the UK (Where they lived and worked during this period).
It’s also cynical to use a minority of the members of NTRT who are facing hardship to promote their case (No sympathy, those people were incredibly foolish and greedy).
Most of the members CAN afford to pay back the taxes they should have paid. The majority of IT contractors, Doctors and Property Developers fall into the top 5% of UK earners. Spare us the sob stories.
Stannus, your “facts” are incorrect. Please revisit. ALL those involved paid tax in the UK. Many at more than 5%. The cost to the individual was similar to that of having a Ltd company. The incentive was certainty following IR35. This isnt about tax but about the right for HMRC to change their mind and punish people retrospectively, even after years and years of inaction and giving legitimate expectation to acceptance.
Please provide evidence.
I have hard evidence. You don’t as what you say is incorrect.
Then please share.
Also,
“This isnt about tax but about the right for HMRC to change their mind and punish people retrospectively “
But the retrospective aspect in your extreme and odious scheme has been through the courts and was judged as legal.
If it’s not about the tax, but the law, then i don’t see why you’re so unhappy? Stop complaining. It’s legal.
Or have you changed your minds now and infact it’s all about morals, not the law?
Are you SURE it’s nothing to do with hundreds of millions of tax you stand to lose because you effectively stole , leaving rest of the tax payers in this country (Note, not the IOM) to subsidize you?
It’s definitely about HMRC changing their mind when they want & punishing people retrospectively. Many users weren’t as greedy as you might think. At least 1 scheme I know of charged 15% fees & users paid UK tax. KPMG & PWC approved the scheme & users were required to fully declare arrangements to HMRC. They should have said they disagreed with it if that was the case. Truth is, they weren’t sure.
I’m sure Stannus feels quite sure whatever rules relate to his arrangements won’t be retrospectively altered. He probably even has an accountant to reassure him. Or maybe he isn’t a contractor at all. Wouldn’t it be a shame if none of us could be certain.
This was clearly just another dubious tax avoidance scheme where members paid little or no UK tax.
Hands up all those with sympathy for people who did not contribute proportionally to this country yet were happy to benefit from the NHS, council services, etc. Especially when from the outset this was marketed so obviously as an avoidance scheme.
The original presentation from Montpelier and any subsequent marketing was always to gain certainty since the introduction of IR35 not for tax avoidance. After all the gain to the individual was not that great. It is lies and ignorance that has put these guys in this position. Unfortunately the ignorance continues…
Here’s an idea on how to reduce the deficit – recalibrate all speed cameras to 10 mph below todays limit.
Take photos over the next week of all cars travelling within that 10 mph window.
Reduce the speed limit nationwide by 10 mph next week and fine everyone who exceeded that limit this week.
Retrospective laws – sounds like the answer to this country’s problems!
The schemes also targeted contractors who were looking for a new way to arrange their affairs after HMRC introduced the Managed Service Companies legislation. Net returns marketed by the schemes were similar to those offered by MSCs (pre legislation), or Ltd Company setups, but with no admin for the contractor & guaranteed to be IR35 proof.
“IR35 insurance”, “IR35 reviews”, it’s all just based on people’s opinions, which may or may not have any relevance or effect to what is said in court. Everyone is marketing their schemes & services to make a buck off the back of the uncertainty constantly injected into the contractor market by HMRC. I would be careful taking the moral high-ground, you may think you are paying a safe and “proportionate” share, you may even have professional advice, but that doesn’t mean HMRC agrees. There are further budget cuts & spending reviews looming. Good luck to everyone whatever decisions you make.
IT Contractor,
Was that supposed to be hard evidence?
This might help :
http://www.publications.parliament.uk/pa/cm201314/cmpublic/financeno2/130620/pm/130620s01.htm
“The scheme purported to produce an effective tax rate of 3.5%. The way that the scheme was intended to work, however, was that the higher the income, the lower the effective rate. In at least one case, the alleged effective rate was around 0.1%”
Also here :
http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2011/893.html&query=huitson&method=boolean
Now, could you please share your evidence that the effect tax rate mentioned above was infact tax or a fee to Montpelier?
And pleae stop using the “certainty over IR35” justification. If you weren’t certain about your IR35 status that’s pretty much a solid pointer to you being a disguised employee. In which case, for certainty purposes, you should have either ticked the IR35 box or joined an umbrella like most honest contractors did.
No, this justification is almost as ridiculous as the “slippery slope” justification. See the preposterous speed limit “argument” from Davey below.
Davey chooses not to understand the term “wholly exceptional” …
http://www.publications.parliament.uk/pa/cm201314/cmpublic/financeno2/130620/pm/130620s01.htm
“The protocol makes it clear that fully retrospective legislation will be “wholly exceptional”.
I invite anyone who thinks this is a simple tax avoidance case to rethink. I have researched this thoroughly… Have you? Some people take the propaganda at face value but those that look into it understand the real issue. Hence the ever growing mp support. Check out the campaigners website to understand more. Hundreds of bankrupt families and one suicide known about so far rings alarm bells…
There are millions of people who go bankrupt, lose their families or homes because they are facing the devastation of cuts and higher taxes. The very same people who have been subsidizing you lot because you chose to cheat system. £200,000,000 would go a long way in helping some of these unfortunate people.
NTRT’s members knew EXACTLY what they were getting into. If they were to stupid or greedy to see this then i’m afraid this is no defence.
Did you greedy idiots not stop and think for one minute that paying no tax on a top 5% income to a country that you both lived and worked in and benefited from all manner of public services might just be too good to be true?
The sympathy card employed by yourself and NTRT just won’t wash. You’re just a bunch of desperate people employing desperate tactics to retain the £200,000,000 you dishonestly avoided.
I’ll ask you a third time .. please provide evidence.
Plenty of evidence on the notoretro web site. It is also proper evidence, not conjecture like “…the scheme purported to…”, which is political spin used to divert the conversation from the crux of the matter. I will again invite anyone to do some digging into what actually happened rather than taking soundbites put out there by HMRC to divert attention from the real issue.
Please provide a link to this evidence. Or cut and paste it.
Cant share my mates tax returns but this will help…
http://notoretrotax.org.uk/key-documents/
I understand people’s anger when they read about these things and why they react wildly. You expect (but don’t like) tax arrangemnets like this from big corporations, but it’s shocking to hear these schemes were so aggressive too.
I still agree with the article though. Unless people have put something incorrect or false on their self-assessments, the tax calculation should stand.
http://notoretrotax.org.uk/key-documents/
No evidence here?
I agree with the article in that if people were honest and fully declared their arrangements and did not make any incorrect or false statements on their self-assessments, the original tax calculation/bill should stand. It should not be subject to retrospective rule changes and recalculation (to clarify my last post).
Examples of evidence supporting these families case, who all along fully declared their income and arrangements:
– Padmore 1987
– Avery jones commentary 1987
– Lamonts comments 1987
– International tax manual 1993
– TE63 2002
– HMRC keeping it “under review”
– ITTOIA 2005
– Many vehemently scathing Hansard comments 2008 (Gauke, Cameron, Osborne…)
– Osborne etc letters 2008/9
– Financial institutions comments 2008
– Jane Kennedy admissions 2009
– Hundreds of returns accepted, including those enquired into, without amendment
– Impact assessments 2009 and 2012
… plenty more.
Meanwhile… nothing from IR/HMRC to let individuals know their arrangements were rejected until May 2007… 10 months before 21 years retro was introduced. Even then they didnt give a reason until Feb 2008.
Good article. Sums up the current situation for these poor families. Todays austerity cannot be applied retrospectively and should certainly not be used to ruin regular people in this way.
Tax was paid in the UK and minimised but with the uncertainty of IR35, given that the arrangement was legal, transparent, discussed openly by the government, left alone and accepted by HMRC it is entirely understandable. The gain after fees etc was not that great compared to a limited company for instance. The difference was that it provided some certainty; that is, until retrospection was brought in… now only death is certain.
ITContractor,
None of those links provide the evidence.
I would just like you to tell me how much income tax you paid during the years this scheme was active.
Thankyou;
Not sure why you want to know about my income tax, but plenty, thanks for asking. How is the weather with you?
It’s very simple.
You stated you had hard evidence that you paid income tax whilst in the Montpelier scam.
I asked you 5 time to produce it.
You didn’t.
Thanks for your input.
Stannus, let me know where I “stated I had hard evidence that I paid uk tax” whilst with Montpelier. Or perhaps that is one of your “facts”?
What I do know as fact, is that all those involved paid UK tax.
Just to set the record straight.
The largest promoter Montpelier charged 10% in fees. In addition, users did pay tax and nic, albeit not very much.
The typical net retention using the scheme was around 85% after fees, tax & nic.
Clarification.
How does this then explain the 0.1% attributed to some of the users of the scheme?
Are you saying this does not take into account the 10% fee charged by Montpelier. Only the tax on top?
If the 0.1% is kosher then I’m guessing this wasn’t a contractor. The scheme was also used by property developers and the like.
The single-digit tax figures being banded around do not include promoters fees. Montpelier charged 10% of gross, and other promoters charged similar fees.
Although it’s true that the net retention was higher than could be achieved through a Ltd Co, these and the current ebt/loan schemes would not exist if it weren’t for IR35.
PS. as far as I’m aware the Montpelier scheme was the first ever mass-marketed contractor scheme to appear, and it started operating in May 2001, one month after IR35 came in.
Cause and effect?
At last someone who seems to know what they are talking about.
I don’t know why the NTRT guys aren’t going after Montpelier. If all this is true then surely they are as guilty, if not more so, than the contractors who entered this scheme.
I’d say the best outcome for all involved would be for the scheme providers and the scheme users to split the tax owed and the penalites and interest.
They both need to take responsibility. And the money has to be paid back.
And just to add … what you CANNOT and MUST NOT do is blame the introduction of IR35 for this.
Many hundreds of thousand of contractors were affected by IR35 and only a minority chose this foolish and greedy route around it.
The rest of them either :
1) Accepted they were disguised employees and ticked the box.
2) Accepted they were disguised employees and joined an umbrella.
3) Were clearly outside.
The blame lies squarely with the promoters and the users. Nobody else.
IR35 created the opportunity for these schemes to proliferate where none existed previously.
It may be a minority of contractors who use schemes of one form or another but, according to a recent National Audit Office report on marketed tax avoidance schemes, it’s a LARGE minority.
There’s been a massive uptake in recent years of EBT/Loan type schemes, and HMRC are snowed under with investigations. Most of the ones I’ve seen offer a similar 85% net retention.
There was nothing particularly exceptional about the BN66 scheme compared to all the other schemes that have come and gone over the years. I’m not sure why they were singled out for retro action but I guess they were just unlucky.
There are other schemes under investigation as far as i’m aware (KPMG, Steed for example)
Maybe they are just getting through these schemes one a time, or maybe it’s because the Montpelier scheme was particularly odious and abusive that it appeared at the top of the list.
Contractors and Doctors earning anything up to £300,000 a year and Property developers earning millions and paying less than 0.1% in tax isn’t going to go unnoticed. Especially when the majority of people on the average wage are being hit from all sides and struggling to make ends meet.
The stupidity of the scheme users in failing to see that any of these schemes were too good is bad enough.
However it’s pretty obvious these individuals aren’t stupid, they just let greed get in the way of their common sense.
Neither greed nor stupidity (or indeed both are a defence i’m afraid.
I think there was bad history between HMRC and Montpelier which may have been why they were initially singled out.
HMRC could have handled things better. They were fully aware of the scheme in 2001 but didn’t move to shut it down until 2008. They even published an internal report on it in 2002:
https://www.whatdotheyknow.com/request/27424/response/67923/attach/3/020731%20Technical%20Exchange%20Issue%2063.pdf
If they’d acted swiftly there would have been no need for retro legislation.
According to that .pdf then
“The result is that income is not taxed anywhere”
So how come they paid “some” tax as you suggest?
It was only the money that went through that part of the arrangement that attracted no income tax. Other money was paid attracting full uk income tax. A more aggressive form of the arrangement would have been to put all money through the 0% route but I don’t think anyone did this.
As explained previously, everyone through Montpelier paid UK tax. I cannot be more succinct. Your “friend” did too if he was Montpelier (the people targeted… Almost all other promoters users had all returns accepted).
Think of the ltd company setup for shareholders… Some money is paid as PAYE and some as dividends. Much the same except the dividend portion attracted no uk tax.
Lets hope ltd company tax law is not changed in the same way as this one. Would make the Treasury a good sum of money.
Most of the “85% schemes” involve the contractor having a small remuneration/salary which is taxed through PAYE etc, and the remainder is routed through offshore trust/EBT/loan etc. If you like, the tax avoidance mechanism replaces Ltd company dividends.
I suppose it would be possible to create a contractor scheme which resulted in 0% tax/nic but I’ve never come across one.
Clarification :
I appreciate your honesty here. But is the amount of NI paid the minimum amount to qualify for a UK pension?
Do you see my issue here?
[quote name=”Stannus”]…But is the amount of NI paid the minimum amount to qualify for a UK pension?
Do you see my issue here?[/quote]
Stannus, this is the problem. The answer is emphatically “no”. There are many many many more ltd company structures out there that do exactly what you are suggesting.
Are you starting to see the issue here?
Give me some figures then. Are you saying you paid more NI than was required to qualify for a pension?
Say I earned £200,000 and joined the Montpelier scheme. How much income tax would I pay on that in one tax year?
Definitely a lot more NI was paid by those involved than required for a pension. Not sure I can give the figures you want but Clarification has summed it up quite well.
Remember, this isn’t about the amount of tax as we could prob tick tack about that all day. It is about these guys and their families being singled out in a way that has never been done before, without doing anything exceptional compared with a lot of other arrangements. Not only that, Hmrc/inland revenue set every expectation that it was perfectly ok.
There are a heck of a lot more schemes around these days, many of which are even more “efficient” than the Montpelier one.
You would think people would have been put off after what happened with Montpelier but apparently not. The National Audit Office estimate at least 20,000 contractors have signed up to these new schemes.
It’s a mystery to me why anyone would risk using a scheme like this in the current climate.
Examples:
http://www.betterpay.co.uk
http://www.vivacontracts.com
http://www.best-pay.co.uk
http://www.contractor-tax-solutions.com
http://www.principalcontractors.com
[quote name=”Clarification”]…It’s a mystery to me why anyone would risk using a scheme like this in the current climate…[/quote]
I agree entirely Clarification. When HMRC can cast todays climate back as far as they like to change their minds retrospectively and bankrupt people to make a buck I dont see why anyone would risk their livelihood.
The problem is, where do you draw the line ? There is a grey area. The line used to be the law… If it was legal fine, otherwise not. If these guys got the chance to test their arrangement according to the law at the time and they lost then tough. Unfortunately this situation allows HMRC to be judge and jury.
Although the Montpelier scheme may well have been legal at the time, that defence won’t cut it anymore.
Legal tax avoidance is no longer tolerated.
[quote name=”Clarification”]…Legal tax avoidance is no longer tolerated…[/quote]
…if HMRC dont like it. If they like it then you are ok. Bit woolly huh ? This is where the law used to come in.
They are ok with pensions and ISAs… at the moment.
Clarification :
Please illustrate how much income tax i would pay if i earned £200,000 and used the Montpelier scheme.
[quote name=”Stannus”]
Please illustrate how much income tax i would pay if i earned £200,000 and used the Montpelier scheme.[/quote]
I don’t have actual figures but this will give you an idea.
£20k would have gone to Montpelier in fees.
Around £20k would have been treated as earned income, subject to tax/nic.
The remaining £160k would have been declared on the self-assessment return as exempt from tax under the UK-IoM double tax agreement.
This structure, using small salary, is how most of the schemes you see around today achieve the headline 85% retention.
Thanks Clarification,
So for someone earning £200,000 then they would have paid £3582 in tax and NI.
That equates to 1.79% tax and NI.
For someone earning £100,000 then if they were taxed on the 10% (£10,000) then this equates to 0.38% tax and NI.
This is virtually no tax.
[quote name=”Stannus”]
For someone earning £100,000 then if they were taxed on the 10% (£10,000) then this equates to 0.38% tax and NI.
[/quote]
The salary component of these schemes was always around £20,000, no matter what the gross earnings were. Also, allowances etc were different back in 2001 when the scheme started.
I respect your right to single out the Montpelier scheme but the fact is it was no different to the myriad of schemes that are available now.
You might find this website interesting. It highlights the growing problem of tax avoidance schemes in the contractor market. What happened to the Montpelier scheme has clearly had little deterrent effect.
http://www.allumbrellacompaniesareequal.com
Stannus, not disputing your first val except that the 20k is theoretical. Second calc is wrong as the base amount was fixed as I understand it so the less you earn the higher the percentage. A vast amount of those involved earned less than 100k. Work it out for 50k and add fees etc. The net gain is not very much and was therefore not the incentive.
Regardless, this isn’t the issue and I think most people get that. The article above explains the issue which has nothing to do with the amount of tax paid.
It is about Hmrc having the power to ignore parliamentary protocol to change their mind retrospectively, without warning and without an impact assessment, leading to bankrupt families who entered an arrangement to gain some certainty on their income following the introduction of ir35.
Plainly wrong and has very worrying implications for the future.
Apologies for misundertanding the $100,000 example.
But 2 points:
First, ITContractor, if you were only earning 50K as a contractor then it strikes me that you would be better of ticking the IR35 box. I don’t believe any of these people were earning much less than £100,000
Secondly, in the case of Alistair Renshaw, the chairman of NTRT and a property developer earning millions, then this odious individual paid < 0.1% tax. What has "being certain" about IR35 got to do with him? IR35 did not affect him. What excuse did he have?
In the case of the Chairman of NTRT, Alistair Renshaw (a property developer earning millions) then according to your calcs he would have paid apply to him.
Also, I doubt many of members of NTRT earner much less than £100,000 or else using the scheme would be ineffective. Infact using ITContractor’s 50K example, then according to your calcs, he would be better off joining an umbrella.
None of this adds up.