Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme (Spotlight 34)

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:

Find out more about how to identify tax avoidance schemes.

Published 14 September 2016