Thousands of contractors using offshore schemes to cut tax are facing a clampdown after HM Revenue & Customs (HMRC) won a High Court ruling to allow it recover tax retrospectively, warns Giant group, the contractor services provider.

Following a High Court ruling last week on 28 January, HMRC can introduce anti-avoidance measures that apply tax retrospectively. This means that any offshore scheme marketed as legitimate could be made retrospectively illegal, leaving contractors having to pay tax backdated for many years.
 
The High Court ruled last week that an IT contractor must pay retrospective tax of £80,000 after HMRC introduced measures in the Finance Act 2008 to close a loophole to prevent contractors receiving income offshore via a trust at a taxable rate of 3.5%. Several thousand contractors are likely to be affected by the ruling, many of whom could now face bankruptcy.
 
Matthew Brown, managing director of Giant group, says: “This ruling sends a clear signal that if tax arrangements are blatantly artificial, they can be taxed retrospectively. Even if a tax scheme expolits a loophole in the current law there are still risks using it. If a tax scheme sounds too good to be true, it probably is.
 
“Numerous providers of tax services to contractors operate offshore. Contractors and recruiters need to be wary about dealing with these providers as the risk of retrospective measures from HMRC has significantly increased.”
 
Brown adds: “Contractors could try to persuade the HMRC to collect outstanding tax from scheme promoters, but this may not be possible, in which case recruitment agencies could also be in the firing line. HMRC has already shown its willingness to include debt transfer provisions in anti-avoidance legislation, so in cases where it believes debts will be unrecoverable from contractors, recruiters could be targeted if schemes are deemed to be managed service companies (MSCs).”

Brown’s comments will add to concerns over the use of offshore schemes.  Contractors who deposited funds with Mirasol Holdings, a split funds scheme, registered in the Turks & Caicos Islands, are already concerned over the security of their money, after the UK arm of Albany went into administration yesterday.