HMRC warning on Entrepreneurs’ Relief tax avoidance scheme

New guidance has been issued by HM Revenue & Customs (HMRC) about a recently discovered capital gains tax (CGT) avoidance scheme, as the Revenue continues to try and prevent taxpayers from exploiting loopholes in the tax regime.

HMRC has identified a scheme that attempts to exploit Entrepreneurs’ Relief by turning income into a capital gain, effectively allowing taxpayers to avoid paying income tax and National Insurance contributions (NICs).

The scheme operates by individuals selling the beneficial ownership of their company to, and taking up employment with, entities based in Cyprus.

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

Those promoting the scheme are advertising that it will reduce monthly payments by making them taxable as a capital gain at 10 per cent using an Entrepreneurs’ Relief claim; rather than as employment income.

They claim the scheme is legal as it is a simple business transaction. However, HMRC has said that the process involves a number of ‘artificial’ steps that are common in tax avoidance schemes.

HMRC has announced it will investigate the tax affairs of anyone who uses this scheme before they submit their tax return and will open enquiries into their activities and seek full payment of the tax due, plus interest and any penalties where appropriate.

LINK: Spotlight on Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme