Huitson V HMRC. What it means for IT Contractors


Huitson V HMRC – What it means for IT Contractors


Huitson V HMRC is an important case as it concerns the extent to which HMRC may bring forward retrospective legislation to combat tax ‘˜schemes‘.

It is an important general principle that retrospective legislation should be avoided as citizens need to know that there is legal certainty in order to carry on their activities.

Huitson utilised a tax planning scheme marketed by Montpelier Tax Consultants which purported to utilise the UK/IOM Double Tax Agreement to exempt Huitson‘s earnings from UK income tax.

In 2008 HMRC changed the law to ‘˜clarify‘ that the Double Tax Agreement cannot be used to create such a result but importantly changed the law so that the new clause was deemed to have always been in effect.

The case affects many contractors – Huitson is a test case for a wider group.


Huitson is an IT consultant and has at all times been a resident of the UK and liable for UK taxation on his worldwide income.

The end users of Huitson‘s services are all based in the UK.

Until 2000 Huitson operated as a self employed consultant working through an intermediary.

Schedule 12

However, Finance Act 2000, Schedule 12, provided that workers supplying services through an intermediary could be treated as if they were employees rather than self employed persons for income tax and NI purposes.

Consequently Huitson became a client of Montpelier in June 2001, they provided advice to Huitson with respect to a tax avoidance scheme seeking to take advantage of the UK/IOM Double Tax Agreement.

This arrangement had three elements a partnership, a trust and consultancy.

Five Companies

The partnership consisted of five companies, known as ordinary partners and a managing partner.

All the partners were within the Montpelier Group and incorporated and tax resident in IOM.

Each ordinary partner was a trustee of a trust established in the IOM.

The partnership entered into an agreement with Huitson to receive a fixed fee of £15,000 for services provided.

The trust of which Huitson is a Settlor, allows the trustee to carry on any business, and the trustee stood possessed of the income of the trust fund upon trust to pay the income to the Settlor (Huitson) during his lifetime.

In other words Huitson is legally entitled to all of the income of the trust.

HMRC Challenge

HMRC did not challenge these arrangements on the basis that they were a sham.

They accepted that the arrangements had genuine legal status.

In their deposition HMRC asserted that the arrangements had been entered into solely for tax avoidance and served no commercial purpose.

This assertion was not disputed by Counsel for Huitson and the presiding officer, Mr Parker described the arrangement as artificial.

Mr Parker noted that the revenue actually generated by the claimant could well exceed £15,000, so by far the largest part of his total economic reward would come to him through his life interest in the Trust.

Not Disputed

It was not disputed that the £15,000 was subject to UK income tax, the point at issue was whether the income arising through the trust to Huitson in his capacity as the life tenant of the trust was subject to UK taxation.

It was Huitson‘s contention that as a result of the DTA and the legislation then applicable (before it was amended with retrospective effect) the income he received through the trust was not subject to UK income tax.


Mr Parker stated that in considering the application for judicial review he is not required to consider the effectiveness of the tax planning scheme but he nonetheless did comment on it.

It is clear that his view is that it is doubtful (at best) whether the scheme was effective and in particular he felt that it is not the purpose of DTA‘s to exempt income, their purpose is to avoid double taxation.

Article 1

In considering the application of the European Convention on Human Rights, Mr Parker referred to Article 1 of Protocol No 1

‘Every natural person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided by law and by the general principles of international law.

The preceding provision shall not, however, in any way impair the right of the State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure payment of taxes or other contributions or penalties’

Mr Parker stated that Article 1 of Protocol 1 does not prohibit the use of retrospective legislation, but retrospective legislation must not impose an unreasonable burden on the claimant.

Such legislation must strike a fair balance between the various interests (the claimant, the state and other taxpayers) involved.


In applying these principles to the present case he noted

O The original legislation in 1988 to reverse the decision of Padmore (on which this derivative planning is based) was itself retrospective. In Mr Parker‘s view this was clear notice that retrospective legislation may be used again.
O The income which it was argued should be protected by the IOM/UK DTA was earned in the UK and was received in the UK by a UK resident individual and was not taxed in the IOM.
O The purpose of DTA‘s is to ensure that income is not taxed twice, they do not exist to exempt income from any taxation.
O HMRC never accepted any tax returns submitted by the claimant, on the contrary they challenged each return.
O HMRC advised the claimant to make payments on account of his potential liability.
O It would not be a fair balance with respect to taxpayers not using this scheme, if the scheme were allowed to operate to totally exempt from taxation the claimant‘s income.

Mr Parker concluded that the retrospective legislation was proportionate in the circumstances.

Is the Huitson case different from Employment Benefit Trust structures

EBT arrangements typically provide that the employee receives a salary and obtains a loan from the EBT.

The salary is subject to UK income tax and national insurance whilst UK income tax and national insurance also arises on the benefit of the loan, if, as is normally the case, it is interest free.

There is specific legislation in the UK to provide for the taxation of benefits arising on employment related loans, meaning that HMRC are aware that such loans may be made in the course of normal employment arrangements.

No income is purported to be exempted from taxation under a DTA.

Indeed all elements of the arrangements are taxed and all UK filing obligations are complied with.

No Reason

As with the Huitson case there is no reason to suggest that the arrangements would be held to be a sham.

It is the view of the writer that EBT arrangements are not unfair to other taxpayers who do not use such arrangements, as full UK taxation is paid by employees under EBT arrangements.

EBT‘s have been in existence for a long time and there is legislation and case law precedents relating to how they can be set up and used.

Ground Rules

An important test case was Dextra v Macdonald, where the ground rules for EBT‘s were laid down and are accepted by HMRC and these rules were, in substance, confirmed in the Finance Act 2003.

In our view an EBT arrangement is fully compliant with UK tax law.

Any challenge by HMRC could only be on the basis that loans advanced by the EBT are in some way not ‘˜real‘ loans.

Consequently all loans should only be advanced under a signed loan agreement and must have clear repayment terms.

We are aware that some EBT‘s advance loans with no fixed repayment terms or with repayment in fifty years. We consider such arrangements to be weak and open to enquiry.

Breach of Human Rights

It is clear from Huitson that there is nothing to preclude HMRC from introducing retrospective legislation.

However following the reasoning of Mr Parker above we are firmly of the view that such legislation, if introduced, would be held to be in breach of the European Convention on Human Rights for the reason that there is pre-existing UK legislation and case law dealing with the taxation of employment related loans.

This law is complied with by employees receiving loans under EBT arrangements and indeed by many other UK taxpayers in receipt of employment related loans.

Contact Details

This article was supplied by Mann Resources, an EBT based in the Isle of Man.. They can be contacted by emailing [email protected]