Entrepreneurs' Relief exploit in HMRC's sights

Contractors are among the taxpayers being alerted by HM Revenue & Customs not to use an avoidance scheme that tries to exploit Entrepreneurs’ Relief (ER).

Divided into four parts, HMRC’s alert (reproduced below) says the scheme seeks to turn income into a capital gain, which then attracts ER and so cuts the income tax and NI liability.

But for spelling out how the scheme works (users sell their company to, and then become employed by, entities in Cyprus), in a short and simplistic way, the alert has been criticised.

Writing today for ContractorUK, tax dispute firm WTT Consulting says the detail HMRC provides around the scheme’s steps, which are identifiers people should be able to easily use to steer clear of it, is “scant.”

“They [the Revenue] should [also] ideally point out existing hurdles, establish the boundaries imposed in previous cases and pinpoint HMRC’s opposition to the scheme.

“And should or could we expect that a deeper description might serve to shed some light…?" asks WTT’s Graham Webber. “This in turn would portray a more robust HMRC approach.”

In addition, Webber is worried that describing the tax situation in play “less than fully, as the Revenue is doing here,” will put other genuine cases of claims for ER in jeopardy.

Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme

Source: HMRC

How HMRC deals with a scheme that tries to exploit Entrepreneurs’ Relief by turning income into a capital gain and what to do if you use it:

HM Revenue and Customs (HMRC) is aware of a new tax avoidance scheme which attempts to avoid Income Tax and National Insurance (NI).

The scheme tries to exploit a Capital Gains Tax Relief called Entrepreneurs’ Relief by turning what would be income into a capital gain.

How the scheme works

Individuals will sell the beneficial ownership of their company to, and take up employment with, entities based in Cyprus.

They remain a director of their company and the company will continue to invoice for their services, even though their employment is now with an entity in Cyprus.

The promoters of the scheme claim the monthly payments will be taxable as a capital gain at 10%, following an Entrepreneurs’ Relief claim, rather than as employment income where Income Tax and National Insurance will be due.

Why you shouldn’t use it

The promoters say the scheme is legal as it’s a simple business transaction but it involves a number of artificial steps that are common in tax avoidance schemes.

HMRC considers this scheme to be highly contrived.

What will happen if you use the scheme

HMRC challenges all cases where Capital Gains Tax Relief is misused and will investigate the tax affairs of anyone who uses this scheme before they submit their tax return.

When a tax return is submitted HMRC will open enquiries into it and seek full payment of the tax due, plus interest. They will also charge penalties where appropriate.

What to do if you’re using this scheme

Speak to your contact in HMRC if you’re a user of this scheme and want to discuss your tax affairs.

You can also contact HMRC by: