Tax avoidance scheme exploiting double-taxation treaty shut down
A TAX AVOIDANCE SCHEME aiming to exploit the UK’s double-taxation agreement with the Isle of Man has been shut down at the first-tier tax tribunal.
More than 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 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.
It was blocked by targeted anti-avoidance legislation in the Finance Act 2008, which put the meaning of the existing legislation beyond doubt. The 2008 legislation has retrospective effect, which 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.
An argument was presented to the European Court of Human Rights alleging the legislation was incompatible with 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”.
The first-tier tribunal agreed with HMRC that 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 decision in HMRC’s favour 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.
HMRC director-general of business tax Jim Harra 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”