BN66 - Double Taxation Treaty Abuse

Offshore Tax Avoidance schemes

Special update January 2010 - Offshore tax scheme warning - Royal Court of Justice ruling

If you have once used or are thinking of using an offshore tax scheme as a way of avoiding UK tax please read the note below.

Thursday 28 January at 9:30am the Royal Court of Justice ruled the retrospective effect of BN66 is not unlawful.

Which in plain English means that HM Revenue and Customs can now go back in time and retrospectively apply a piece of tax legislation which will affect thousands of contractors who either once used or are still using an offshore scheme/company as a way to avoid paying UK taxes.

HMRC can now go back as far as 1987 (which is when BN66 was imposed), so even if a contractor used a scheme in 1987 for one day or one year, they may now have to pay both fines and backdated taxes.

This news further supports the fact that contractors should think very carefully before using offshore schemes as a way of avoiding paying UK taxes.

Basically if you live in the UK, work in the UK, get paid for work you do in the UK, there is no way and has never been any way of avoiding UK taxes. Working through your own UK limited company is and has always been the most tax efficient way of working legally.

For more information visit our Offshore tax schemes or UK Limited company? page.

If you have any questions about working through your own legitimate UK limited company, as many hundreds of thousands of contractors already do and many millions of other UK limited companies do, please don’t hesitate to call 01442 275789 or email:

Now back to the original content for the page.

Huge changes and possible back tax implications for anybody who is or has been using an offshore company to avoid paying UK taxes. If you are currently using an offshore scheme, or have used one in the past which avoids paying UK taxes, 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 thus avoiding UK taxes.

HMRC website. “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.”

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

HMRC website.  “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.”

NEW CHANGED FOR 2008  - 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 severe.

In addition to the full amount of tax owed, a penalty of a similar value will also be levied along with interest on late payments. Your tax liability will backdate retrospectively to when the tax was first payable rather than when the legislation became law.

Anyone who uses offshore schemes as a way of avoiding UK tax should be very cautious as following the latest budget changes, back taxes and penalties could be extremely high. The old adage holds true now as it has always done if it sounds to good to be true, it probably is’. 

A ‘legal’ and tax efficient alternative for contractors is to trade through your own limited company. Any accountant will tell you that trading through your own limited company is the most tax efficient way of working. If you would like to understand more about how it all works and what you could be taking home please visit the following pages:

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