HMRC singles out IT contractors in £200m tax case

The sixth attempt to quash an anti-avoidance rule that retrospectively outlawed a scheme that IT contractors once legally used has failed, even though a seventh and eighth attempt loom.

Ruling last week, the First Tier Tribunal dismissed Robert Huitson’s appeal against ‘BN66,’ in line with the High Court, the CoA, the Supreme Court, a judicial review and the ECJ.

Each of these has been approached by Huitson who, on behalf of other contractors who used the scheme by Montpelier Tax Consultants, got caught by Budget Notice 66 (BN66) in 2008.

Issued by the-then Labour government, the notice both prospectively and retrospectively shut down Isle of Man-based trusts, which for years returned scheme users a UK income rate of just 3.5%.

Almost £200m in tax liabilities were therefore demanded of the users by HMRC, which says that roughly 2,000 people - “IT contractors” in particular – now have those liabilities “due”.   

However, as the Revenue’s timetable for approaching scheme users to pay will have to take account of any appeals process, payment looks far from imminent.

In fact, ContractorUK understands that not only is another ‘BN66’ appeal ongoing (by property developers), but that also Montpelier plans to appeal the FTT’s decision to the Upper Tribunal.

That appeal team is likely to consider what appears in the FTT’s ruling to be a blow to Mr Huitson; namely that his request to amend his grounds of appeal in three ways was rejected.

This request was an “abuse of process” and was made “so late in the day,” decided Tribunal Judge Jonathan Cannan, who said that only a single ground of appeal can therefore stand.  

That ground of appeal by Huitson was that the backdated anti-avoidance rule, found at Section 858 (4) of the Finance Act 2008, “did not apply to his circumstances.”

His legal team argued he wasn’t caught by the rule because his entitlement under the trust was to a share of the “profits”; not to a share of the “income” – which the section stipulates.   

But the judge was not convinced. Addressing Huitson, who was trying to overturn a tax bill of £195,000 (made up of tax, national insurance and interest), the judge told him:

“It is not unnatural in the context of income tax to refer to an entitlement to income from a partnership when meaning an entitlement to a share of the profits of the partnership.

“In particular when it is in the context of a beneficiary’s entitlement to trust income which comprises the trust’s share of the profits of a partnership in which it is a partner.”

HMRC welcomed the tribunal’s “positive decision”. The department’s Jim Harra, 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.”