Save content
Have you found this content useful? Use the button above to save it to your profile.

Retrospective law scuppers avoidance scheme

by
23rd Oct 2015
Save content
Have you found this content useful? Use the button above to save it to your profile.

Should Parliament ever change the tax law with retrospective effect? What if the target of the rule change is a marketed tax avoidance scheme, does that make the retrospection reasonable or morally justified? Rebecca Cave reports on a tribunal case that turned on these points.

Robert Huitson challenged the government’s decision to enact retrospective legislation on the basis that it was contrary to the European Convention on Human Rights. He took the case because he had used a tax avoidance scheme that was undermined by the change in the law.

He lost his argument about human rights at the Court of Appeal, but that did not deter him from challenging the law at the tax tribunal.

The scheme, marketed by Montpelier Tax Consultants (Isle of Man) Ltd, was designed to avoid UK tax on contracts performed by consultants in the UK. It is estimated that over 2,000 people used the same tax scheme, many of whom were IT contractors.  

Huitson entered the scheme in 2001. This involved him setting up a trust in which he held an interest in possession, so he was entitled to receive income that the trust received. The trust in turn was a member of a partnership in the Isle of Man, and that partnership contracted to provide Huitson’s services to companies in the UK.

Huitson received an annual fee of £15,000 from the partnership, which was taxable in the UK. However, the bulk of his reward was a share of the profits from the partnership, as they flowed through to the trust. Under the double tax treaty between the UK and the Isle of Man Huitson was not taxed on the partnership profits, as he was not personally a member of the partnership, the trust was.

There had been similar schemes in the past, which had been blocked by legislation (now in ITTOIA 2005, s858). However, FA 2008, s58(3) inserted added ITTOIA 2005, s858 (4) which stated: “For the purposes of this section the members of the firm include any person entitled to a share of the income of the firm.”

Controversially this amendment was deemed always to have had effect, so it bit on the profits taken by Huitson from 2001 onwards. 

At the first tier tribunal hearing in Robert Huitson v HMRC [2015] UKFTT 0448 (TC) the appellant argued that s858(4) did not apply because he was entitled to a share of the profits of the partnership, not a share of the income. The Tribunal judge accepted that it would have been preferable for Parliament to refer to profits rather than income. However, as s858(4) was enacted precisely to counter such schemes which involved a sharing of profits, he would take a purposive interpretation of the provision and read it such that the partnership income was construed to mean partnership profits.

It is not known whether this decision will be appealed to the upper tribunal. If this is the end of the road for Huitson he faces a combined tax, NIC and interest bill of around £195,000 for the six years to 5 April 2007. The other participants in the Montpelier scheme will receive similar bills. 

Replies (3)

Please login or register to join the discussion.

avatar
By Justin Bryant
27th Oct 2015 10:32

"Retrospective legislation

creates uncertainty and damages business confidence, as Justine pointed out. It also denies taxpayers the opportunity to adjust their behaviour in a legitimate way to avoid an additional tax burden." Not my words, but David Gauke's words. See: http://forums.contractoruk.com/accounting-legal/68901-bn66-court-appeal-...

http://www.theyworkforyou.com/pbc/2007-08/Finance_Bill/11-0_2008-05-22a.9.0

Thanks (0)
Replying to Glennzy:
avatar
By ctaguy
06th Nov 2015 20:31

Fair comment
Yes it was tax avoidance, but the landscape was such in 2001, that entering into a Montpelier scheme was not considered 'morally repugnant' and the scheme itself was not considered 'egregious'. Add to that the full on and sometimes aggressive nature of the way these schemes were promoted and many people often signed up to them without fully appreciating the consequences of what they were agreeing to. Lots of unsophisticated scheme users, at whom these contractor types of arrangements were targeted, often felt dazed and confused following a barrage of technical jargon from the promoter's sales guys.

I appreciate the above sounds controversial in the new dawn, but if questioned whether the taxpayer would enter into a similar scheme in 2015, one could speculate that he probably wouldn't. Therefore is it fair to retrospectively reverse the treatment of the transactions entered into 14 years ago?

Thanks (0)
avatar
By Justin Bryant
09th Nov 2015 12:23
Thanks (0)