By Qdos Contractor
Contractor tax avoidance scheme defeated
After two failed judicial review challenges and the Supreme Court's refusal to grant appeals against the Court of Appeal's judgements, and also failing to impress the European Court of Human Rights, the Montpelier tax avoidance scheme was finally defeated at the First Tier Tax Tribunal.
Over 2,000 people, the majority of which were IT contractors and property developers , used the scheme and who will now collectively owe the tax man up to £200 million.
Robert Huitson, who took the appeal to the Tribunal, was an electrical engineering consultant resident in the UK. In April 2001 he entered into a tax avoidance scheme marketed by a firm of tax consultants called Montpelier Tax Consultants (Isle of Man) Limited. The scheme involved setting up an Isle of Man trust of which Mr Huitson was the settlor and in which he had an interest in possession, or a right to income. The trust became a partner in an Isle of Man partnership which in turn entered into a contract with Mr Huitson to provide his services. Under his contract with the partnership Mr Huitson was entitled to an annual fee of £15,000. He was also entitled to a share of the partnership profits as a beneficiary under the trust.
If the Scheme operated as Montpelier intended, Mr Huitson would pay income tax and national insurance on his annual fee of £15,000. However he would pay no income tax or national insurance on sums paid to him as beneficiary of the trust. The scheme purported to exploit the terms of the UK - Isle of Man Double Taxation Arrangements.
Finance Act 2008 however introduced retrospective legislation which provided that a partner in the relevant circumstances would be liable to income tax despite the existence of double taxation arrangements.
In June 2001, Mr Huitson paid £1,000 to an Isle of Man company called Crackington Ltd to establish the Robert Huitson Family Settlement (the Trust). Crackington was the trustee and Huitson, as a beneficiary, was entitled to income of the Trust during his lifetime.
Crackington entered into partnership with four other Isle of Man companies in December 2001. Each one of those companies were also trustees of Isle of Man trusts set up by other participants of the avoidance scheme. The partnership was known as the “Allenby Partnership”, of which Montpelier was the “Managing Partner”.
In August 2001 the Allenby Partnership entered into a contract for services with Mr Huitson under which he agreed to provide electrical engineering consultancy services and advice, and to develop electrical engineering IT. Mr Huitson contracted to work at least 1,200 hours per year. Under that contract he received a fixed fee of £15,000 per annum.
The intended effect of the Scheme was that Huitson would be treated as being entitled to the partnership profits as if he were a partner in the Allenby Partnership. They were the commercial profits of an Isle of Man enterprise and as such were not subject to UK tax. At the same time, the Isle of Man would not tax Mr Huitson on income from the trust because he was not resident in the Isle of Man. In the words of judge Kenneth Parker, the Scheme would “appear to realise every taxpayer’s dream of lawfully avoiding, or at least greatly reducing, income tax in any jurisdiction”. In the case of Mr Huitson the effective rate of tax he would suffer on his income would be approximately 3.5%.
HMRC become aware of the Scheme by July 2002 and enquiries into Mr Huitson’s tax returns were opened together with enquiries into the returns of other clients of Montpelier who had used the Scheme.
The enquiry into the 2001-02 return commenced on 4 December 2003. On 16 May 2007 HMRC wrote to Mr Huitson and the other clients stating that they did not accept the claims to relief and that representative cases were being taken to the Special Commissioners. In February 2008 HMRC wrote to Montpelier stating that the Scheme was caught for tax.
Having lost his appeal at Tribunal, Mr Huitson now faces a a combined tax, NIC and interest bill of around £195,000 for the six years ended 5th April 2007.
Published October 2015