BN66 - Double Taxation Treaty Abuse

***March 2010 Update***
A press notice “Protecting Tax Revenues” was released alongside March’s Budget statement which announced attacks on payroll and offshore "schemes" that exploit several tax "loopholes."

The notice says that "The government is taking further action to change the game for those seeking to bend or break the rules on tax."

As a result legislation will be introduced from 06th April 2011, to stop businesses using Employee Benefit Trusts to make 'disguised payments' of remuneration to trustees.

***January 2010 Update***
Devastating news for contractors as judge Justice Parker ruled that the retrospective action of BN66 is not unlawful and dismissed the claim for judicial review “I hold that the challenged legislation, although having retrospective effect, is in the relevant circumstances proportionate and compatible with A1P1 (Article 1 of the First Protocol to the European Convention of Human Rights). Accordingly, I dismiss this claim for judicial review. Montpelier, the offshore provider which the defendant used, has vowed to appeal the decision.

***October 2009 Update***
Following no response to the letter they sent to HMRC in July, the JCHR have decided not to pursue this matter any further. They will however produce a report based on the information they have collected to date and this will be used in the Judicial Review early next year.

***July 2009 update***
The Joint Committee of Human Rights has written a letter to HMRC condemning the retrospective action of the BN66 legislation. The JCHR have requested to see details of the assessment HMRC carried out and justification of the retrospective action they are imposing.

***June 2009 update***
Following testimonials submitted by contractors affected by BN66, the Joint Committee on Human Rights has opened an inquiry into maladministration. The hearing is due on 16th June and will determine whether they have permission for a Judicial Review to challenge the legislation.

*** March 2009 update***
A poll is running on a popular contractor forum and currently, almost 50% of readers who have previously used an offshore scheme have received tax demands of between £75,000 and £200,000.

*** February 2009 update*** The Judicial Review submitted to challenge the retrospective action being threatened under the BN66 legislation, has recently been refused. An appeal is being launched against the decision and the Judicial Review re-submitted to the Courts.

***December 2008 update***
A popular contractor forum is bringing news that contractors, who have used offshore schemes in the past, are now receiving tax demands for anything up to £100,000.

If you are currently using an offshore scheme which avoids paying UK taxes, or have used one in the past, it is extremely important that you read on!

These schemes work by diverting income earned in the UK through a foreign company/bank account which is then routed back to the UK resident and thus avoids the UK taxation system.

“UK residents are taxable on their income wherever it arises. A wholly artificial scheme seeks to avoid UK tax by artificially diverting income of a UK resident individual to a foreign partnership comprised of foreign trustees.” - Extract taken from HMRC website.

Legislation has been in place since 1987 which has made these schemes illegal. Companies have, however, continued to operate schemes, usually based in Isle of Man or other countries with lower rates of tax than the UK, claiming that UK legislation does not apply to them.

“If you would have been liable to UK tax and NICs had you been employed directly by the client, you must pay UK tax and NICs under these rules, whether or not your service company is located in the UK.” – Extract taken from HMRC website.

The 2008 budget further clarifies the legislation (BN66) and proposes to put a stop to these schemes altogether. If the proposals are made law and you have previously been using an offshore scheme, the implications will be quite severe.

In addition to the tax owed, a penalty of a similar value will also be payable PLUS interest on late payments. Proposals means interest would be charged at 8.5% per annum on any tax paid late.

Your tax liability will backdate retrospectively to when the tax was first payable rather than when the legislation became law.

HMRC are currently suggesting that, to reduce the amount of interest payable, anyone affected makes a payment on account now rather than wait for the final liabilities to be established.

A Certificate of Tax Deposit (CTD) stops HMRC adding more interest to your liability. You can pay any amount you like into a CTD. Whatever you pay in will no longer attract interest.

To stop further interest altogether, you need to pay in an amount equal to your potential tax liability. For example, if your current tax liability is £100,000 and £30,000 is owed in interest, then you need to deposit £100,000 to prevent the £30,000 from rising. However, any amount you pay in will help to reduce further interest.

ContractorUmbrella processes all your income through PAYE so you can rest easy at night and you won’t have the worry about large tax bills or penalties.

For an idea of the outcome, if you were to be investigated by HMRC and had previously been using an offshore scheme, please see our BN66 example.

Our free guides section is an invaluable source of information for both first-time and career contractors alike.
If you have any further questions about BN66 or contracting in general, please either call our new client services helpdesk on 01206 713680 or e-mail info@contractorumbrella.com