Retrospective tax avoidance legislation ruled LEGAL

Another nail has been placed in the coffin of 'artificial' tax avoidance schemes.

The media is today reporting the outcome of a claim for judicial review brought by Robert Huitson - who is described as a UK resident self-employed IT contractor. By arranging his affairs to conform with an avoidance scheme being marketed by Montpelier Tax Consultants in the Isle of Man (IoM), Mr Huitson paid the equivalent of just 3.5% tax on his income. He had secured this 'tax advantage' since first becoming a client of Montpelier in June 2001.

The scheme in question exploited the terms of the UK-IoM Double Tax Agreement (DTA) and was well known to HMRC.

As part of his March 2008 Budget, the Chancellor published BN66 - Double Taxation Treaty Abuse. This announced the introduction of retrospective anti-avoidance amendments to legislation introduced in 1987. The new rules were enacted as section 58 Finance Act 2008 despite some protests by opposition parties at the retrospective nature of the law.

The Government stated that UK users of a scheme that exploited a loophole in the 1987 legislation “remain liable to UK tax”, and have done since 1987, “despite the elaborate, artificial structure designed to exempt them.” Obviously those who had been promoting tax avoidance schemes that exploited the loophole were unhappy. As were many of those who had bought into such schemes - arguably in good faith that those promoting the schemes seemed genuinely confident that the schemes were both legal and effective.

In considering the facts of the case reported today, Mr Justice Kenneth Parker noted that:

"Whatever the true meaning of the DTA, there was a wider rationale in terms of public policy: UK residents should pay UK income tax on the profits of any trade or profession; and a DTA, intended to relieve from double taxation, should not be used as an instrument either to avoid all taxation or to reduce it to well below the level that would be applicable to the relevant income in the country of residence."

This strikes me as suggesting a purposive interpretation of the law.

He also stated, in defending HMRC's approach:

"...in my view, the state was not obliged to test the matter first in the courts before enacting legislation, even with retrospective effect. The public policy was of such paramount importance that legislation was necessary in any event to put the position beyond all doubt and to maintain the relevant public policy"

"At no time did HMRC indicate to affected taxpayers, including the Claimant, that they could safely rely upon the arrangements. On the contrary, HMRC consistently maintained that the arrangements did not work, and advised taxpayers to pay on account the income tax which HMRC said was properly due. Any prudent taxpayer who followed that advice would not now be prejudiced by the retrospective effect of the legislation."

As I have indicated many, many times on this blog, there is often a long time lag between someone entering into a tax avoidance scheme and when they can be certain as to the outcome. In this case HMRC first wrote to Mr Huitson 18 months after he started to use Montpelier's scheme. And it's only now, a further 7 years later that the outcome is clear. The High Court has ruled that the backdating of demands by HMRC was 'in the relevant circumstances proportionate' and did not breach human rights.

I have no doubt that the promoters of tax avoidance schemes will continue to assert that there is only a very small chance of any future anti-avoidance legislation being retrospective. They may be right as the facts here were specific to Double Tax Agreements. However I am equally sure that the goal posts have moved further together such that the scope for successful avoidance schemes is now smaller than ever.

Previous relevant blog posts:

• HMRC confuse tax avoidance and tax evasion again
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules
• Tax avoidance is a card game - the metaphors multiply
• Tax avoidance - what are you allowed to do? A simple guide.
• Tax avoidance schemes - a simple guide
• Naive promoters of tax avoidance schemes
• Five facts all accountants need to know about tax avoidance schemes
• Five more facts all accountants need to understand about tax avoidance schemes