Property developers and IT workers lose '5pc income tax' fight

Property developers and IT contract workers must now pay tax bills of more than £100,000 after a tribunal victory by HM Revenue & Customs confirmed it could apply anti-avoidance laws retrospectively.

More than 2,000 people are facing tax demands totalling £200m, having used entirely legal schemes in the early 2000s to avoid paying UK income tax, now banned.

British workers could legally set up an offshore partnership in the Isle of Man in order to reduce their rate of income tax to just 5pc. The Government closed the loophole in its "double-tax" agreement with the self-governing dependency in the 2008 Finance Act.

Last month a judge ruled in tribunal documents published this week that the Revenue could retrospectively enforce the legislation – before it received assent – to force workers like Mr Huitson, an electrical engineer, to pay backdated taxes.

The decision has opened the floodgates for HMRC to demand the backdated taxes and comes as it is flexing new powers to force people to pay years-old tax within a 90-day time-frame.

Taxpayers are being told to "pay now, argue later" by the taxman, which can issue so-called "accelerated payment notices" to force the upfront payment of tax, even if it is subject to dispute.

Previous challenges to HMRC's power to collect £5.5bn in upfront taxes on the basis that they breach human rights laws have been rejected.

Mr Huitson had already defended the tax avoidance scheme, which was marketed by Isle of Man-based Montpelier Tax Consultants, to the UK Supreme Court and European Court of Human Rights.

The international court dismissed his complaint as "manifestly ill-founded" in rejecting claims that the tax demand infringed his human right to "peaceful enjoyment of his possessions."

The 2008 Finance Act was passed with retrospective effect and it caught taxpayers like Mr Huitson who had income rights attached to an Isle of Man trust, of which he was both the "settlor" and "beneficiary".

• HMRC given go-ahead to demand £5.5bn from taxpayers – before they have chance to appeal

At the same time, the trust paid Mr Huitson a salary of £15,000 fee, on top the partnership's "profits".

Mr Huitson paid income tax and national insurance on the £15,000 but escaped taxation on the rest – the £100,000 that he received as the beneficiary of the trust. With HMRC's added interest and penalties, the total demand is £195,000.

Alison Graham Wells of Montpelier Tax Consultants, defending Mr Huitson, argued that the legislation contravened EU law because it restricted the movement of money between member states.

But HMRC, which has been investigating Mr Huitson for almost a decade, disagreed.

"This is yet another example where some people try to abuse the tax system to deprive Britain of money for vital public services," said Jim Harra, director of business taxation at HMRC. "This is unfair on the majority who pay their fair share."

Since the 1980s Mr Huitson, who worked for businesses including Network Rail, had operated as a limited company but joined the offshore scheme in 2001, during which time his net annual income exceeded £300,000.

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