Contractors' Questions: Is the door open to retrospective taxation?

Contractor's Question : Is it just those IT contractors who stand to be affected that think the High Court's judgement on BN66, which went in favour of the taxman, opens the door for HM Revenue & Customs to expand retrospective taxation, or do experts in the tax and legal fields think the same?

Expert's Answer: The case and the legislation that gave rise to it do arouse concerns. Not for the legislation per se and the blocking of the scheme - that had long been expected. HMRC had known about the arrangement for some time; the fact that they didn't take action sooner is itself a concern as clearly it made some people think that it had been accepted.

The long retrospection is unprecedented and of concern to all because tax systems should aim to give certainty. Retrospection is inherently unfair, creates uncertainty and risks damaging trust in the system.

The expert was John Whiting of the Chartered Institute of Taxation.

Expert's Answer: Whilst we recognise that the High Court Judge has clearly set out his reasons for upholding the 2008 Finance Act which allowed HM Revenue & Customs to claim back this tax retrospectively in this particular instance, we share a common concern with all taxpayers that this judgement may be seen as opening the door to retrospection.

For a seven year period up to 2008 HMRC failed to take any action before the law was changed, despite being well aware of these arrangements. Whilst PCG in no way encourages off-shore tax arrangements we object in the strongest terms to taxpayers being retrospectively penalised for arranging their tax affairs in a way which was entirely legal and proper at the time they undertook to do so."

I note our concern with retrospective taxation is widely shared. PCG will continue to watch this area very closely. HMRC must not feel this is a green light to retrospectively challenge other, entirely legitimate behaviour.

The expert was Chris Bryce, chairman of the PCG.

Expert's Answer: What is clear is that the government are intent on using all resources at their disposal to attack all tax avoidance schemes. If the judgement stands as it is, they may be able to introduce retrospective legislation in extreme cases.

Contractors should treat all schemes offering high returns with extreme caution. The fact that a scheme has counsel's opinion should be taken with a pinch of salt. The ultimate decision on whether a scheme will work will be handed down by the courts.

The tried and tested methods of operating as a contractor are PAYE umbrella companies and personal service companies. Tax avoidance schemes are expensive in terms of fees and high risk. Contractors should in my opinion steer well clear of them.

The expert was Tim Warr, a chartered accountant, who was an expert witness in the High Court case of Montpelier Vs Jones & Morris, September 2009.

Expert's Answer: The case related to a particular trust arrangement but could have implications for similar offshore trust-based schemes. It is quite justified for the government to attack complex schemes set up to avoid tax but it should not do it retrospectively.

The expert was Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants.