An IT contractor has just failed in an attempt to prevent HMRC applying retrospective legislation to an off-shore marketed IR35 tax avoidance scheme.

The scheme involved the use of an offshore settlement in order to enable contractors, and other UK workers to pay income tax in the Isle of Man (and other locations), whilst working and living in the UK. 

The court ruled that it was fair and proportionate for HMRC to backdate measures introduced in Section 58 of the 2008 Finance Act to prevent tax avoidance through the misuse of Double Taxation Treaties by UK residents.  

IT contractor Robert Huitson whose Isle of Man offshore tax vehicle was set up and administered by Montpelier Tax Consultants faces a tax billl of £100,000. It is estimated that several thousand contractors have been using similar schemes. The ruling means that they too will be liable to backdated tax, interest, and penalties.

A the hearing, the judge pointed out that HMRC had already warned participants in offshore schemes that they may be liable to further taxation, and that the backdating of tax demands did not breach human rights as it was "in the relevant circumstances proportionate". The judge refused a request to appeal the judgement. However, Mr Huitson may still request leave to take the case to the Court of Appeal.

Editorial comment
Offshore trust schemes for contractors are widely marketed and although as this judgment illustrates some kinds may be of limited use to UK domiciled UK residents they can be extremely attractive to non-UK domiciled workers, especially those who are short term contracting in the UK and other parts of Europe.

Update Nov 2011: the case is confirmed as going to appeal.