Examples of how the GAAR applies to tax arrangements

3.4 Huitson – DTAs
3.4.1 Background
This relates to an avoidance scheme which it is said enabled UK residents,
through certain provisions of the UK/Isle of Man “IOM” DTA, to carry on a
trade or profession in the UK at a very low effective tax rate.
The UK resident contracted to provide his services through an IOM
partnership where each of the partners was a trustee of an interest in
possession (“IIP”) trust of which the taxpayer was the settlor and life tenant.
The scheme relied on the provision at Article 3(2) of the DTA which it was
claimed exempted from UK tax the share of the partnership profits received in
the UK in his capacity as a beneficiary under an IIP trust.
No tax was paid in the IOM and the tax paid in the UK was at an effective rate
of c.3.5%
3.4.2 The scheme
A UK resident individual carries on a trade of IT consultant in the UK.
The individual enters into a contract to provide his services to an IOM
partnership consisting of 5 IOM companies which then contracts out his
services to end users.
Each IOM company is a trustee of an IIP trust of which a UK resident
individual is the settlor and life tenant.
The partnership therefore comprises of five trustee companies of five separate
IIP trusts in which five separate UK residents are the settlor and beneficiary of
their own IIP trust.
The end users make payments to the partnership in respect of services
provided by the appropriate individual.
The individual receives an annual fee of £15,000 from the partnership and
additional funds from his trust as beneficiary which are equivalent to the
partner’s share of the profit of the IOM partnership.
The annual fee is taxed in the UK at normal rates but the other funds received
from the IOM trustee company are claimed to be exempt from UK tax and also
attract no tax in the IOM.
3.4.3 The relevant tax provisions
The UK/IOM Double Taxation Agreement
Section 858, ITTOIA 2005
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