Up to £200m due after HMRC defeats avoidance scheme in Tribunal

A complex tax avoidance scheme used mainly by property developers and IT contractors has been defeated at Tribunal by HM Revenue and Customs (HMRC).

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%.

The scheme was blocked by Parliament in 2008. A scheme user, Robert Huitson, challenged the amending legislation, taking the case to Tribunal.

The Tribunal’s positive decision for HMRC means that the property developers and IT contractors who were the main users of the scheme now collectively owe HMRC up to £200m in unpaid tax.

Jim Harra, HMRC’s Director General of Business Tax, 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”

Notes to editors

1. It is common for two countries to enter into an agreement to ensure that that individuals and businesses in those countries are not doubly taxed on the same income.The UK has many such agreements including arrangements with Crown Dependencies.Trying to exploit these double-taxation agreements and arrangements to avoid tax is contrary to their purpose.
   
2. 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).
   
3. 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 2008 legislation has retrospective effect.
   
4. The retrospective legislation was 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.
   
5. An argument was presented to the European Court of Human Rights alleging the legislation was incompatible with Article 1 Protocol No.1 of the Human Rights Act. In February 2015, the Court unanimously declared the application inadmissible stating that “this complaint is manifestly ill-founded and must be rejected”.
   
6. The First-tier Tribunal agreed with HMRC that the scheme was blocked by the retrospective legislation.
   
7. Tribunal ruling available here: http://www.bailii.org/uk/cases/UKFTT/TC/2015/TC04621.html
   
8. ECHR ruling available here: http://hudoc.echr.coe.int/eng#{"fulltext":["huitson"],"languageisocode":["ENG"],"itemid":["001-151222"]}
   
9. Follow HMRC Press Office on Twitter @HMRCpressoffice.
   
10. HMRC's Flickr channel: http://www.flickr.com/hmrc.gov.uk.