IT contractors hit by closure of £200m tax avoidance scheme

Commons and Lords committee questions restrospective nature of clause that opens up seven years of tax demands

Timms: £200m tax at stake

The joint Lords and Commons Human Rights Committee has waded in to support freelance IT contractors hit by tax demands going back up to seven years, following the retrospective closure of a £200m tax avoidance scheme.

The committee said notes to the 2008 Finance Act explained that a clause was intended to counter a tax-avoidance scheme purporting to exempt UK residents from tax on income received by using provisions in double taxation treaties. The notes said the aim was to put beyond doubt that where UK residents are members of foreign partnerships, nothing in any double taxation treaty affected their tax liability and that UK individuals "remain liable to UK tax despite the elaborate, artificial structure designed to exempt them".

But the committee has now complained that it was not told of the retrospective nature of the provision in section 58 of last year's Finance Act when it cleared the legislation, nor given any explanation of the government's justification for the action or sight of an impact assessment .

IT contractors, project managers and oil and gas engineers are among those affected by the act, intended to safeguard up to £200m in tax revenue. Many face tax demands with "punitive interest" for late payment and the impact on the individuals and their families "appears to be severe", said the committee.

A survey showed 57 of those affected could not meet the demands even if they sold their family home and 29 more could only do so by remortgaging. The committee said: "A number of people face personal bankruptcy. The related financial worry is causing mental health problems and marital breakdown."

Treasury financial secretary Stephen Timms told MPs in a written Parliamentary answer that £200m in tax is at stake and formal impact assessments were not made "where the impact is only on those who are avoiding tax".

The committee found that in the absence of a satisfactory justification for the retrospective application of the clause, there was an arguable case for a breach of Article 1 Protocol 1 of the European Convention on Human Rights, which has been written into UK law.

Committee chairman Andrew Dismore has written to Timms demanding an explanation, with evidence that HM Revenue and Customs has consistently made the case since previous legislation in 1987 that the avoidance scheme concerned does not work.