UK tax man wins case against dream offshore tax avoidance scheme

News - Tax

Written by Ray Clancy

Friday, 29 January 2010 09:19

Users of an offshore tax avoidance scheme could find themselves being investigated by the UK taxman seeking £100 million in tax due.

HM Revenue & Customs had its right to use the 2008 Finance Act to seek funds from an estimated 2,500 tax evaders upheld by the High Court in London after a challenge by a self employed IT consultant failed.

Robert Huitson, who used an intricate Isle of Man tax arrangement to avoid £85,000 of income tax over seven years, had argued that HMRC’s retrospective levy on taxes contravened his human rights as guaranteed under the 2008 Human Rights Act because until then HMRC had failed to take any action despite being aware of the scheme for a number of years.

But judge Justice Parker rejected this, saying users had been warned about possible future challenges to the scheme, adding that the Government has the right to change tax law retrospectively to end 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,’ the judge said.

At the centre of the case is a tax avoidance scheme marketed by Isle of Man based tax consultants, through which, using a complex web of partnerships and trusts, UK business contractors or consultants could channel work to customers and also receive their income. As most of the income eventually came via a family trust, no tax was paid on it either in the UK or the Isle of Man.

The court was told during the hearing that dozens of other people using the scheme would be unable to pay their tax bills if the High Court ruled in the HMRC’s favour and the tax authorities took a similar approach with them. But the judge said HMRC would take financial hardship into account when levying tax.

In Huitson’s case, the scheme meant he paid income tax of just 3.5%. Huitson’s solicitors say they intend to appeal.

The tax avoidance scheme has been well known in the accountancy industry. 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.