'BN66 contractors' defeated in court

Thousands of IT contractors reacted with shock and disappointment this morning, after the Royal Court of Justice ruled the retrospective effect of BN66 is not unlawful.

Mr Justice Parker, sitting in court 10, rejected claims put last week on behalf of the taxpayer that the backdating of Section 58 of the Finance Act breached human rights.

His court also refused an appeal, paving the way for HM Revenue & Customs to pursue the taxpayer, Robert Huitson, an IT contractor, and thousands like him.

Although further challenges to BN66 are possible, the ruling represents the first time a court has backed the retrospective effect of the rule, which came into force in 2008.

Montpelier, the provider of the scheme which Huitson used, has vowed to appeal the decision, though such an appeal will take time before it is heard by a higher authority.

BN66 imposed tax liabilities dating back to 1987, but Mr Justice Parker said those affected would not now be challenging the backdating had they acted prudently.

"At no time did HMRC indicate to affected taxpayers, including the claimant, that they could safely rely upon the arrangements," the judge ruled..

"HMRC consistently maintained that the arrangements did not work, and advised taxpayers to pay on account the income tax which HMRC said was properly due."

In line with arguments put by David Elvin, QC, for the taxpayer, the judge did accept that there had been "long inaction" – a period of seven years – from the tax authority.

Yet HMRC never said or hinted that legal proceedings would first be pursued before the enactment of any legislation, or that any legislation would not be retroactive.

The subtext of the judgement, then, appears to be that while HMRC acted proportionately, taxpayers on 'BN66 schemes' acted at their own risk.

The judge even hinted that they kidded themselves, and said they could have 'brought the issue to a head' by appealing closure notices, or by settling up with HMRC.

He said: "It might also have been thought that, with the passage of time and long inaction on the part of HMRC, the likelihood of retrospective measures receded, and it was safer to let sleeping dogs lie.

"However, if such tactical calculations were made, taxpayers simply ran the risk that at some point parliament might legislate to put the matter beyond doubt, and might well do so…retrospectively".

The judge added: "In so far as taxpayers may have relied upon the route previously travelled by HMRC and the legislature in Padmore, they did so at their own election and risk."

Full analysis of the judgement, including the views of leading tax, accounting and legal experts, to follow.

Thursday 28th January 2010