Contractors who participated in offshore tax schemes offered by Isle of Man scheme provider Montpelier Tax Consultants may face retrospective taxation by HMRC under the so-called BN66 rule following a ruling by the Court of Appeal.
Lord Justices Mummery, Sullivan and Tomlinson unanimously rejected the appeal by contractor Robert Huitson who has been attempting to have the retrospective taxation declared unlawful under human rights laws, claiming that those affected by BN66 “would face bankruptcy, financial worry, health problems and marital breakdown”.
However, the court found that: “In the circumstances of this case, the liability of the claimant under the retrospective legislation of s.58 to pay the UK income tax that he would have had to pay, if he had not participated in the tax avoidance scheme, is no more an unjustified interference with his enjoyment of his possessions than the ordinary liability that his fellow residents in the UK are under to contribute, by way of UK tax on their income, towards the costs of providing community and other benefits for the purposes of life in a civil society.”
The original ruling in January 2010 found that by backdating an amendment to the Finance Act (2008) to take effect from 2001, HMRC had not breached the Human Rights Act. This ruling has been upheld, with Lord Justice Mummery commenting “As the judge [of the original ruling] commented, the tax outcome was paradoxical: by the use of DTA [double taxation agreements] measures aimed at avoiding the imposition of double taxation on UK resident taxpayers, the claimant, as a UK resident, was able to reduce his effective UK income tax rate to an average of 3.5%.”
Lord Justice Mummery went on to say that the objective of double taxation treaties is not to “facilitate the avoidance of tax, or its reduction below the level of tax ordinarily paid by residents.”
Members of the scheme were warned by HMRC that the scheme was open to challenge, allowing the estimated 2,500 participants to set aside funds in anticipation of tax bills when they became due, but many chose to ignore that warning.
The Budget Note, or BN66 as it has become known, was released by HMRC in March 2008, with two aims. The first was to ensure that existing legislation, dating back to 1987, was clarified so that it had the effect intended.
The second was to close a loophole that allowed UK residents to receive their income from the Isle of Man and use double taxation treaties. These were originally designed to ensure that an individual or organisation is not taxed twice on the same income, but were exploited by offshore tax consultants to enable UK residents to avoid their UK tax liabilities.
Scheme provider Montpelier Tax Consultants is expected to issue a statement detailing its response to the ruling.