Retrospective tax attack on contractors' offshore trusts schemes

Legislation to nullify an off-shore tax planning scheme used by some contractors will be treated as having always had effect, exposing contractors to potentially massive retrospective tax bills.

Measures in the Finance Bill 2008 will retrospectively cancel the effects of a scheme in which taxpayers set up trusts for their benefit in tax havens, such as Guernsey or the Isle of Man, to which future income is derived from the UK. The individual then receives payments from the trust as a beneficiary tax free by virtue of the relevant double taxation treaty. The provisions are expected to come into force this month.

According to giant group plc, the contractor services provider, this avoidance scheme was first used by property developers, but became very popular when it was aggressively marketed to self-employed IT, engineering and management consultants.

Matthew Brown, Managing Director, giant group, said: "This legislation could apply to a significant number of contractors. HMRC will be able to pursue tax retrospectively as far back as 1987. We could be talking about tax bills running into hundreds of thousands of pounds in some cases.

"Retrospective tax legislation has become increasingly common under this Government. The sub-clause of the Finance Bill which contained the retrospective element of this measure provoked fierce criticism during the debate at the committee stages.

"Contractors could try to persuade HMRC to collect outstanding tax from scheme promoters, but this may not be possible, in which case traditional recruitment agencies could also be in the firing line."

Retrospective

Freelancer trade group, the Professional Contractors Group (PCG) felt the Government was right to target these types of schemes, but also expressed concern about the retrospective element of the measure.

Its managing director, John Brazier, said: "PCG has always clearly advised that, where tax is concerned, if something seems too good to be true it usually is, and that aggressive schemes like this are best avoided. We are not surprised that the Government has turned its attention to them, and given that they flout the spirit of the law so blatantly we feel the Government is right to do so. Happily PCG members seem to have heeded our advice - we know that over 95 per cent use limited companies, and the rest tend to use umbrellas or be sole traders.

"We do not like the retrospection of this measure, however: the Government claims to be "clarifying" legislation passed in 1987 so that it works as intended. But if this is necessary, it cannot have worked like that up to now: so in reality they are introducing a new item of law with retrospective effect.

"This is a dangerous principle and the Government ought not to be setting such a reckless precedent. We want to see a fair treatment from the Government for freelancers who are in business on their own account and seek to meet their lawful tax obligations accordingly - retrospection has no place in such an arrangement."