The Danger of Offshore Schemes

A high court case to prevent contractors from avoiding tax by using elaborate offshore schemes has been won by the government. Many contractors will now have to pay back dated tax to 2001/2002 tax year with one contractor having to pay £85,000 in backdated tax for the last 6 years.

The judge found that one of the primary factors against the contractors’ case was the lack of commercial reason for their arrangements other than to avoid tax. The case was brought by HMRC after a law called Budget Note 66 (BN66) was introduced in 2008 to tackle tax avoidance by offshore schemes. The fact that contractors have to pay tax retrospectively from 2002 until the law was introduced has prompted anger and controversy.

Roger Sinclair of the legal firm, Egos, pointed out “This case does rather illustrate the dangers of using tax avoidance schemes which rely on artificial arrangements, where the arrangements lack any apparent commercial purpose, beyond the reduction of the tax bill.”

John Whiting, of the Chartered Institute of Taxation mentioned: “I think all tax practitioners will worry a bit about this judgment if it is seen as opening the door to retrospection.

The main lesson to take from this ruling is not to dabble in offshore avoidance structures if you are resident and working in the UK. The safest and legal method of maximizing your income is through a Limited Company.