Perilous Avoidance Schemes

Robert Huitson and Ian Shiner lost out in the Court of Appeal in their applications for a judicial review of the retrospective effect of S.58 Finance Act 2008, aka BN66, 'UK residents and foreign partnerships'.

Both taxpayers had participated in a marketed tax avoidance scheme set up in the Isle of Man. Robert Huitson was a client of Montpellier whose own particular scheme involved a partnership and a trust located in the Isle of Man. Mr Huitson provided IT consultancy services via the Allenby Partnership with whom he entered into a consultancy agreement. The partnership paid Mr Huitson £15,000 or less p.a which was subject to UK tax. The Allenby Partnership consisted of five Isle of Man companies and each partner was a trustee of a Isle of Man Interest in Possession Trust. Robert Huitson was the settlor and life tenant of one of these trusts into which he paid £1,000.

The majority of Mr Huitson's fee income was channelled through his trust which was in excess of £15,000 p.a. The Allenby Partnership would pay profits to the trustee who, in turn, would pay this to Robert Huitson. Mr Huitson claimed this income was neither taxable in the Isle of Man, because of concessions made by the islands fiscal authorities, nor in the UK, by virtue of Article 3 of the UK-Isle of Man Double Taxation Agreement.

Mr Huitson claimed double taxation relief for the trust income in his 2002 self assessment tax returns and subsequent returns and HMRC did not challenge this until June 2004, although they gave no reasons for such until February 2006. At this point, the Revenue advised the taxpayer to make a payment on account so as to mitigate potential tax, interest and penalties. In May 2007, HMRC advised that they were preparing a number of cases for hearing by the Special Commissioners that challenged the validity of the double tax relief claims. Before these cases were listed for hearing the March 2008 Budget announced the introduction of legislation that would render the tax avoidance scheme ineffective beyond doubt, ie, S.58 Finance Act 2008.

After failing in the High Court to force a judicial review on the grounds that the legislation was incompatible with the Human Rights Act 1998, Mr Huitson was again unsuccessful in the Court of Appeal as it ruled that the retrospective legislation was proportionate and thus compatible with the Human Rights Act. The court said that in this issue in this case was whether the retrospective law achieved, “a fair balance between the interests of the community and the rights of the individual”, and the balance lay with the community.

Ian Shiner was involved in a similar tax avoidance scheme, which involved a land partnership. He had contributed £10 to an Isle of Man trust and claimed that the retrospective legislation discouraged investment of capital in foreign partnerships and therefore the free movement of capital and was therefore contrary to article 56 of the EC Treaty.

The Court of Appeal said the £10 payment had nothing to do with the Isle of Man structure. The money was put into a trust for Mr Shiner and not into the Manx partnership. The payment was not therefore a movement of capital within the meaning of article 56.

Again, the taxpayers' application for judicial review was dismissed.

Tax avoidance schemes can be extremely attractive to high earning contractors, with their allure of high income retention but many simply will not stand up to scrutiny. Getting involved with these schemes may seem like a good idea at the time but a freelancer could end up paying more in tax, interest and penalties, and professional fee's than they would had they simply settled on good, old fashioned acceptable tax planning. Promoters of these tax avoidance schemes should include  the following warning, 'Using this scheme may damage your wealth'.

Next week we will examine the warning signs to look out for when considering participation in a tax avoidance scheme.