Yesterday (5 October) HMRC confirmed it defeated an avoidance scheme at a tribunal.
The scheme aimed to exploit the UK’s double-taxation agreement with the Isle of Man. Over 2,000 people used the complex and artificial arrangement, believing it would reduce their rate of income tax to typically less than 5 per cent.
The complex and artificial scheme used a trust and a partnership in the Isle of Man to try to claim exemption from UK taxation via the Isle of Man Double-Taxation Arrangement (DTA).
Over 2,000 people signed up to such an arrangement from 2001-02 to 2007-08, before it was blocked by targeted anti-avoidance legislation in Finance Act 2008, which put the meaning of the existing legislation beyond doubt.
The scheme was blocked by parliament in 2008 but a scheme user, Robert Huitson, challenged the amending legislation, taking the case to tribunal, despite the legislation being applied retrospectively.
In April 2001 Mr Huitson entered into a 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, as well as 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 retrospective 2008 legislation was also challenged via two Judicial Reviews, both of which failed. In February 2012, the Supreme Court refused an application to hear appeals against the Court of Appeal’s judgments in these two cases.
Jim Harra, director general of business tax at HMRC, said: “This is yet another example where some people try to abuse the tax system to deprive the UK of money for vital public services.
“This is unfair on the majority who pay their fair share.”