'BN66 contractors' get their day in court

Thousands of IT contractors are one step closer to finding out if HM Revenue & Customs acted lawfully when it introduced a rule retrospectively to demand they pay hundreds of thousands of pounds in tax.

Having spent two days in an open session at the Royal Courts of Justice, Mr Justice Parker on Thursday closed a judicial review into HMRC's move to backdate Section 55 of the Finance Act.

Known as BN66, after the Budget Note it was issued upon, the clause targeted schemes which used a loophole in the UK's Isle of Man double taxation treaty to return their users lower income tax and national insurance bills.

Typically, the schemes channelled a UK resident's income to a lower-tax foreign partnership, with foreign trustees, which stayed as their own income thanks to their status as a trust beneficiary.

For seven years, this type of tax-planning scheme flourished without intervention by HMRC, and proved attractive to freelancers in the engineering, management and IT sectors.

But in March 2008, the government issued Budget Note 66 which stated the authorities wanted to close the loophole arising from the decades-old treaty so that it had "the effect it intended."

They were, the government claimed at the time, issuing a "clarification" – but most controversially, the clarification was backdated to the law's commencement year - 1987.

As a result, liabilities for taxpayers using the scheme were backdated to when the tax first became payable, in addition to retrospective interest charges, rather than from March 2008, when the clampdown was announced.

In the Budget note, the government made clear that its intervention, while delayed and retrospective, was designed to prevent tax avoidance through the "misuse" of double taxation treaties by UK residents.

One apparently affected IT contractor reflected: "We could never have foreseen that HMRC would enact retrospective legislation in the way that they have. They gave us no warning, of any kind, that such a thing would be done."

His comment came in 'BN66 – the road to judicial review' - a posting on Contractor UK's forum, which has become such a regular meeting place for those affected that it was cited during the judicial review.

Affected taxpayers have used the thread to confirm fears of bankruptcy, repossession and relationship break-ups due to the high tax demands under Section 55.

These accounts help explain why the Parliamentary Joint Committee on Human Rights has criticised the retrospective effect of Section 55.

Whether or not the Revenue did act unlawfully by backdating the legislation is being decided by Justice Parker, who is expected to issue his judgement in an open court over the coming weeks.

Almost regardless of his verdict, an appeal is likely to be launched by whichever party it does not favour, at which stage the House of Lords would be asked to settle the issue within five years.

A Lords' ruling against HMRC would result in affected IT contractors having their tax demand for the disputed period quashed, while its victory would mean that their full liability, including interest since it became due, is owed and is payable.

Writing in CUK's forum, one contractor close to the case reflected: "We've had our day in court. Now we have the wait for the judge to deliver his verdict."

Friday 22nd Jan 2010