Recent UK legislation has resulted in the real possibility that contractors using offshore umbrella companies could face massive back tax bills.

For a number of years now many contractors have worked via umbrellas companies based offshore in jurisdictions such as the Isle of Man. These companies have offered contractors up to 85 per cent of their income by operating from locations outside the UK tax system. However, the Finance Act 2008 introduced measures to prevent tax avoidance through misuse of double taxation treaties for income arising on or after 12 March 2008.

It also introduced legislation that retrospectively cancels the effects of a scheme popular with contractors in which they set up trusts in tax havens, funded with income derived from the UK, receiving payments tax-free due to the relevant double taxation treaty.

In theory HMRC could reclaim any unpaid tax from as far back as 1987 giving the potential of hefty tax bills. Interest and penalties (of up to 100 per cent of the tax due) can also be levied for non-payment.

On the 29th September the UK and the Isle of Man signed a new tax information exchange agreement  which will allow the UK to enforce domestic tax laws by obtaining information from the Isle of Man on tax issues.

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