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Contractors’ off-shore tax avoidance scheme fails


A tax scheme used by contractors to circumvent IR35 rules has been scuttled by the ‘transfer of assets abroad’ rules, so their partnership profit shares under the scheme were taxable in the UK.

8th Apr 2022
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This was a test case concerning three taxpayers (Lancashire, Lee and Johnson), who were all UK taxpayers mainly engaged as freelancers by financial institutions in London.

They all used tax schemes (promoted by either de Graaf or Montpelier), which aimed to avoid the IR35 rules, and keep the majority of their contracting income out of the UK tax net. Montpelier notified the arrangements to HMRC under DOTAS in September 2004.

The tax schemes involved the establishment of a trust in the Isle of Man, of which each taxpayer was the life tenant and under the terms of which was entitled to the income of the trust as it arose. The trustee was an Isle of Man company.

The trustee formed an Isle of Man partnership. That partnership entered into a services contract with the taxpayer, under which the taxpayer agreed to provide services to the partnership or, if requested, to third parties, in return for a fee payable by the partnership.

The partnership then entered into an agreement with a UK Montpelier entity, that in turn entered into an agreement with a UK recruitment agent, for the taxpayer to provide services to an end client, with an agreed fee due to each entity under these arrangements.

Ultimately, the taxpayer would receive a fee paid by the partnership and a profit share (routed through the trust), which equated to the sum the taxpayer expected to receive in return for the services provided to the end client, less a fee due to Montpelier of between 6%-10%.

The tax schemes involving Johnson and de Graaf were broadly similar.

HMRC enquiry

Each taxpayer accounted for tax on the basis that the fee was subject to income tax in his hands (as income from self-employment or employment depending on the arrangements). The profit share, was treated as being exempt from tax by virtue of article 3(2) of the double tax treaty between the UK and the Isle of Man.

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Replies (8)

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By Paul Crowley
08th Apr 2022 22:14

This is where the claimed tax gap is
Will MTD stop such evasion?

Thanks (5)
By AndrewV12
11th Apr 2022 10:30

'Transfer of assets abroad
The FTT found that the creation of rights under the services agreement constituted a transfer of assets to the partners in the partnership (who were based in the Isle of Man). By entering into the services agreement:'

Its all been tried before and failed, tax avoiders are going to have to go further a field than the isle of Man.

Thanks (1)
Donald MacKenzie
By Donald MacKenzie
11th Apr 2022 11:02

These sorts of contrived schemes exist only to avoid tax.

The promoters ought to be driven out of the profession for bringing all tax agents into disrepute. They take their cut, so I hope they take a share of the pain when their schemes are ruled unlawful.

Thanks (2)
Replying to Donald MacKenzie:
11th Apr 2022 11:48

You could argue that the schemes are no more contrived than the IR35 regime they attempted to get around. Contractor-subcontractor arrangements where both parties are happy with the arrangements should be left alone. IR35 is just a money grab, so there is no moral high ground for HMRC here.

Thanks (3)
11th Apr 2022 11:12

All such schemes that have no commercial basis are being chased by HMRC. Even looking at the scheme mentioned how could any tax professional think that it would work?

Thanks (3)
By North East Accountant
11th Apr 2022 11:27

"Montpelier notified the arrangements to HMRC under DOTAS in September 2004".

Top marks to HMRC for acting so quickly to close this's only taken 18 years.

Thanks (9)
By G Webber CTA
11th Apr 2022 11:48

The case is, as indicated, going to UTT on March 2023. In the meantime there are other cases in which elements of the points arising here are being considered. Most pertinent is perhaps the Hoey case which was heard in the Court of Appeal at the end of March. A decision is awaited.

A key point in the Lancashire case is whether ToAA anti avoidance legislation should take priority over long standing core legislation, in this case last consolidated in ITEPA. If, as HMRC claim, it should, we could find ourselves having retrospective law applied by virtue of over riding anti avoidance law introduced years after the event. I understand all the points around "not letting tax avoiders get away with it", but this could be anarchy and the rule of law thrown in the bin.

I also understand the points about tax advisers and whether they could/should have promoted a scheme "that clearly did not work". I think the fact that the scheme was stopped in 2008 by the introduction of retrospective law (s 58 FA 2008)is an indication that it probably did work. HMRC then changed the rules. In response the facts of the structure have been looked at and more modern "purposive interpretation" rules applied and defences constructed.

Is it the case that a tax adviser not involved in the original scheme but who thinks that a new analysis has at least an arguable case, should not mount that defence because of "tax avoidance"?

Obviously I think not. I think that so long as clients understand the risks and rewards, we have a duty to put up the best case we have.

To go down the line that "it's tax avoidance and as tax advisers we should take a moral/ethical stance and ignore our obligations to clients" is dangerous and worse than promoting schemes that clearly do not - and will never - work (and we've seen plenty of those).

Thanks (5)
By ds
13th Apr 2022 18:52

Do footballers and various associated "entertainers" not use transfer of assets overseas scams to get around the pesky and expensive UK tax laws ? Will we see more HMRC timely investigations into these schemes ? Not that they seemed in a great hurry about the scheme in the article as it took eighteen year to get this far and it's not over yet !

Thanks (0)