Over 2,000 people used the arrangement, which was marketed by Isle of Man-based firm Montpelier Tax Consultants, believing it would reduce their rate of income tax to typically less than 5%.

The scheme was blocked by anti avoidance legislation contained in the Finance Act 2008, which could be used retrospectively. A scheme user, Robert Huitson, challenged the amending legislation, taking the case to the FTT. [Robert Huitson and the Commissioners for Her Majesty’s Revenue & Customs TC04621 Appeal number: TC/2013/01387 [2015] UKFTT 448 (TC)].

Huitson, an electrical engineering consultant resident in the UK, entered the scheme in April 2001, setting up an Isle of Man trust of which he was the settlor and in which he had an interest in possession, or a right to income. The trust became a partner in an Isle of Man partnership, the Allenby Partnership, which in turn entered into a contract with Huitson to provide his services. Under his contract with the partnership Huitson was entitled to an annual fee of £15,000. He was also entitled to a share of the partnership profits as a beneficiary under the trust.

The Allenby Partnership had no permanent base in the UK and, given that Huitson was entitled to the partnership profits, he was therefore not subject to UK tax.

However, at the same time Huitson was not taxed by the Isle of Man because he was not resident there, meaning he avoided paying tax in any jurisdiction.

If the scheme operated as Montpelier intended, Huitson would pay income tax and national insurance on his annual fee of £15,000. However he would pay no income tax or national insurance on sums paid to him as beneficiary of the trust.

In response to this and similar avoidance schemes, section 858(1) and (2) Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) was enacted, which provided that a partner in the relevant circumstances would be liable to income tax despite the existence of double taxation arrangements. At the FTT Huitson sought to argue that the effect of the trust structure was that his income from the trust would be treated as being of the same nature as the underlying trust income, namely a share in the partnership profits. However he was not be a member of the partnership and therefore section 858 would not operate to prevent reliance on the DTA, meaning it was not effective in counteracting the Montpelier scheme.

The FTT disagreed with Huitson’s argument, stating: ‘In our view it would be extraordinary if Parliament intended s858(4) to refer to a person having a share in the gross income of a partnership. Section 858 itself was clearly an anti avoidance provision aimed initially at schemes such as those in Padmore involving a share of profits.’

The FTT found that: ‘In our view it is not unnatural in the context of income tax to refer to an entitlement to income from a partnership when meaning an entitlement to a share of the profits of the partnership. In particular when it is in the context of a beneficiary’s entitlement to trust income which comprises the trust’s share of the profits of a partnership in which it is a partner.

‘In the light of the legislative history, and giving the provision a purposive construction, we are satisfied that the scheme is caught by s858. Mr Huitson is to be treated as a member of the Allenby Partnership in all the relevant tax years because he was entitled to a share of the income of the partnership.’

The FTT also rejected a second argument put forward by Huitson, which they said had been volunteered very late in the day. This sought to argue that s858(4) contravened EU law because it was an unlawful restriction on the movement of capital between member states and infringed Article 56.

Huitson also wanted to clarify the existing grounds of appeal and dispute the amount of statutory interest payable.

Jim Harra, HMRC’s director general of business tax, said: ‘This is yet another example where some people try to abuse the tax system to deprive the UK of money for vital public services. This is unfair on the majority who pay their fair share.’

The retrospective legislation has also been challenged via two judicial reviews, both of which failed. In February 2012, the Supreme Court refused an application to hear appeals against the Court of Appeal’s judgments in these two cases.

An argument was presented to the European Court of Human Rights alleging the legislation was incompatible with Article 1 Protocol No.1 of the Human Rights Act. In February 2015, the Court unanimously declared the application inadmissible stating that ‘this complaint is manifestly ill-founded and must be rejected’.

The FTT ruling is here

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