HMRC prevails in trial against £200m double taxation loophole

HM Revenue and Customs (HMRC) has succeeded against a £200 million tax avoidance scheme which exploited the UK’s double taxation agreement with the Isle of Man, whereby people are not taxed on the same income in both the UK and the Isle of Man.

Those who took advantage of the loophole believed it would slash their rate of income tax to below five per cent.

More than 2,000 taxpayers signed up to the tax avoidance scheme between 2001 and 2008, with the majority of people utilising the scheme said to be property developers and IT contractors.

The loophole exploited allowed partnerships in countries with a double taxation agreement with the UK to be treated as an individual ‘person’ as opposed to a company. As a result, taxpayers could avoid paying tax by claiming they were entitled to profits from the Trust.

The scheme was eventually shut down by anti-avoidance legislation within the Finance Act 2008, which helped clarify the rules surrounding double taxation agreements.

HMRC’s victory at tribunal means the scheme’s members now owe a combined £200 million in unpaid tax.

The avoidance scheme, promoted by Montpelier Tax Consultants, involved setting up an Isle of Man trust in which the scheme members were beneficiaries. This enabled the individuals to receive income from the trust.

The Isle of Man trust would then become a partner in an Isle of Man partnership, which entered a contract with individuals to offer services.

As part of the contract, members would be entitled to annual fees which they would pay income tax and national insurance on. Nevertheless, members would also receive a share of the Isle of Man partnership profits as a beneficiary within the trust, which they do not pay income tax or national insurance on.

In the case of one of the scheme’s users, Robert Huitson, who brought the case to tribunal, received an annual fee of £15,000 as part of the Isle of Man partnership for which he paid income tax and national insurance on.

However, Mr Huitson did not pay tax on any other income within the Isle of Man trust between 2001 and 2008; avoiding an estimated £195,000 in income tax and national insurance contributions.

The first-tier tribunal agreed with HMRC that these avoidance schemes were blocked by parliament in 2008, resulting in a win for those that pay what they owe.

Jim Harra, director-general of business tax, 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.”