UK Court Allows HMRC To Impose Retrospective Penalties

by Robin Pilgrim, LawAndTax-News.com, London

03 February 2010

The High Court in the UK has ruled that HM Revenue and Customs can impose tax retrospectively on a group of self-employed contractors who took advantage of an offshore sheltering scheme.

Robert Huitson, a self-employed IT contractor, had argued in the case Huitson v HMRC [2010] that the tax department had several opportunities to close down the avoidance scheme, which utilized trusts based in the Isle of Man, in the years before the government changed the law in the 2008 Finance Bill allowing HMRC to close the loophole retrospectively. This, it was argued, was a breach of Huitson's human rights.

However, Mr Justice Parker disagreed, and argued that HMRC was within its rights to pursue individuals who had used "wholly artificial arrangements."

The effect of the scheme, Justice Park pointed out, was to reduce Huitson's effective rate of income tax to 3.5% and he said that "if it worked, [the scheme] would, therefore, appear to realize every taxpayer's dream of lawfully avoiding, or at least greatly reducing, income tax in any jurisdiction."

"It is also immediately plain that the tax avoidance scheme, if it worked, would be singularly attractive to any person in the position of the claimant, that is, any resident of the UK who, as a self-employed person, carried on a trade or profession here," he added.

Huitson, who began using the scheme in 2001, was landed with a GBP100,000 tax charge by HMRC. About 2,500 other individuals also used the scheme, which was marketed by a company based on the Isle of Man, and the potential revenue claw back for the government could reach a total of GBP100m.

The Professional Contractors Group (PCG), which lobbies on behalf of independent contractors in the UK, said the ruling could open the door to further retrospective tax claims by HMRC.

“Whilst we recognize that the High Court Judge has clearly set out his reasons for upholding the 2008 Finance Act which allowed the Revenue to claim back this tax retrospectively in this particular instance we share a common concern with all taxpayers that this judgment may be seen as opening the door to retrospection," said PCG Chairman Chris Bryce,

“For a seven year period up to 2008 HMRC failed to take any action before the law was changed, despite being well aware of these arrangements. Whilst PCG in no way encourages off-shore tax arrangements we object in the strongest terms to taxpayers being retrospectively penalized for arranging their tax affairs in a way which was entirely legal and proper at the time they undertook to do so," Bryce added.

Huitson is expected to appeal the ruling.

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