BN66 was an advisory note produced by HM Revenue and Customs (HMRC) in March 2008 which was aimed at UK residents who are, or were, participating in the avoidance scheme of claiming all of their income from the Isle of Man despite not living there. A double taxation treaty exists to ensure that an individual is not taxed twice on the same income when it is earned in a foreign country.
How BN66 affected the Finance Act 2008
BN66 introduced two measures, firstly to retrospectively clarify existing 1987 legislation so that it had "the effect it intended", and secondly to prevent tax avoidance through the misuse of double taxation treaties by UK residents. The latter measure was to be introduced from 12 March 2008, however the former measure was to be treated as if it always had effect and therefore would be retrospective. These principles were then cemented within Section 58 of the Finance Act 2008.
Since then over 2000 people who have used this scheme have been receiving huge tax bills, in some cases going back up to seven years and sometimes totalling hundreds of thousands of pounds. The demands include punitive interest charged for late payment.
One of the main arguments against HMRC's actions is that generally, when a tax avoidance scheme or loophole is closed, it cannot apply its decision retrospectively. When a tax avoidance scheme is discovered it must be notified to HMRC under the Disclosure of Tax Avoidance Schemes rules, and if HMRC decide to close it down it must make an announcement that it intends to do so and the scheme closed down prospectively (i.e. from the date of the announcement).
Critics of BN66 state that HMRC are ignoring their own rules, and if it was aware of this avoidance should have acted much sooner. According to Nigel Jagger, a former user of the scheme, "HMRC had known about the scheme since 2001, and it was fully disclosed on tax returns, but they waited seven long years before taking any action."
But is it retrospective?
HMRC have argued that it is not, in fact, retrospective because it is simply ensuring that the legislation is being correctly applied, and that it only came to light in 2004 using new disclosure rules. Before this it was unaware of the abuse due to not being provided full details of individuals' participation in the scheme through their self-assessments. Furthermore, it has argued that the "loophole" that was being used in these schemes never actually existed and was misinterpreted by the scheme providers, which BN66 aimed to clarify. In effect, those participating in the offshore schemes were given bad advice from the scheme's advisor's.
Speaking of the situation, Nigel Jagger has stated "the use of retrospective legislation should be a concern to all taxpayers, not just freelancers. Once the precedent is set that HMRC can go back in time and change the law to suit their own devices then there is no telling where this could lead."
Action taken so far
Those affected, including the scheme provider Montpelier, have united against this themselves have been exploring multiple avenues to fight what they deem to be retrospective legislation, including petitioning MPs and fighting for a judicial review at the High Court.
The latest support has come from the Joint Committee on Human Rights, who have stated that in their current view the changes enacted by section 58 of the Finance Act 2008 breach the human right to peaceful enjoyment of possessions in Article 1 of Protocol No. 1 of the European Convention on Human Rights.
The committee's verdict
The committee's stance was formed following the receipt of a survey provided by Nigel Jagger of contractors affected by the legislation. The representations made in the survey found that the average liability was £140,000 (made up of £113,000 backdated tax and £27,000 interest). 62% of respondents stated that they could not meet the tax demand even if they sold all of their assets. Many indicated that although bankruptcy was an option, it would prevent them from continuing in their current line of work as they often worked within financial institutions and government agencies which have specific solvency rules.
The committee was also concerned of the human cost of HMRC's actions. 48% of respondents had stated that they were under severe stress and 8% were suffering from depression. Many had children and indicated that their marriage had been placed under enormous stress.
The committee claims that the representations question whether the Government has provided a sufficient justification in their actions to date. Stephen Timms MP (Financial Secretary to the Treasury) has previously stated in May 2009 that an impact assessment of the effect of the closure of the schemes was not necessary because "formal impact assessments are not published in respect of measures where the impact is only on those who are avoiding tax." However, the JCHR has decided that without this impact assessment an arguable breach of Article 1 Protocol 1 has occurred.
In a letter dated 7th July 2009 to Stephen Timms MP the JCHR has asked to be provided with a memorandum setting out a detailed assessment of the impact of Section 58 of the Finance Act 2008 on those affected, with detailed justification for the provision having retrospective effect. They have also demanded evidence that throughout the entire period of 1987 to 2008 HMRC "has consistently made the case that the avoidance scheme in question does not work."
The deadline for this memorandum is 21st July 2009. In the meantime, those facing huge tax bills continue to wait. As a final comment on the predicament facing users of the scheme, Nigel Jagger argues that "retrospective legislation also rewards failure on the part of HMRC."
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