Contractor defeated in £400m offshore tax case

The taxman has been given the go-ahead to pursue 15,000 self-employed workers for unpaid tax, after an appeal by a contractor who used the same offshore scheme was defeated.

The scheme, marketed by Consulting Overseas Ltd, offered such independent workers a remuneration package that was touted to save hefty amounts of income tax and NICs.

Once signed up as staff of Isle of Man firm Sandfield Consultants, the contractors received most of their income as loans in foreign currencies, which were falling against the pound.

About 350 contractors lowered their tax bill by exploiting this “artificial exchange rate” when using sterling to repay the loan, which “in reality [was] income from their employment.”

The verdict adds that the contractor, Philip Boyle, even admitted that he never viewed the loans as anything other than a way to receive his income without suffering tax on it, in an admission that was surely unhelpful to his appeal.

Handed down last week, the judgement states: “Mr Boyle had no need for a loan, there was an entirely artificial exchange rate; the reality is that there was no borrowing by Mr Boyle.”

The 41-page document from the tax tribunal adds that “no evidence” was provided by him or his legal team that the foreign currency at the heart of the transfers ever actually existed.

The scheme’s artificiality goes some way to explaining why the tribunal judgement’s in favour of HMRC is “hardly surprising,” one legal expert serving contractors said last night.

But also speaking to ContractorUK, a chartered accountancy firm said there were lessons to be learnt for contractors and others using schemes to mitigate their tax liabilities.  

Kingston Smith said: “Although the case was lost by the taxpayer, the narrative to the judgement illustrates the importance of using DOTAS (Disclosure of Tax Avoidance Schemes) numbers when completing a tax return.

“The judge made clear reference to the use of this number to defend a tax discovery notice and assessment when issued by HMRC.”

The firm’s Paul Spindler explains there are currently lots of tax scheme users receiving ‘discovery assessments’ – assessments outside the normal enquiry window - which HMRC can only issue when it finds out something it was not aware of.

He added: “HMRC have challenged a number of cases now where people have not put disclosure on returns, and the courts appear to be saying that if a taxpayer has disclosed the structure (by putting the scheme reference number on the return) , then this is a sufficient defence.”

The accountant thinks that some tax scheme users may still be challenged even if they do put the DOTAS number on their return, and so recommends that, “for peace of mind,” individuals input extra details into the form’s white box.

The guidance comes too late for Mr Boyle and the scheme’s 347 other users - of whom 226 have already settled with HMRC and paid approximately £5million, equating to an average of £22,000 in taxes per individual.  

Also according to the Revenue, similar schemes have been used by 15,000 other people who it has now vowed to pursue, with a view to collecting up to £400m in tax that, before the judgement, would have been avoided.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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