UK tax authority HM Revenue and Customs (HMRC) has said that it is aware of a new tax avoidance scheme that attempts to exploit Entrepreneurs’ Relief by turning what would be income into a capital gain.
According to HMRC, individual scheme users will sell the beneficial ownership of their company to, and take up employment with, entities based in Cyprus. They will 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.
HMRC said the promoters of the scheme allege that the monthly payments will be taxable as a capital gain at 10 percent, as part of an Entrepreneurs’ Relief claim, rather than as employment income where income tax and National Insurance contributions (NICs) will be due.
HMRC said that it considers the scheme to be highly contrived. It added that it challenges all cases where capital gains tax (CGT) 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 inquiries into it, and seek full payment of the tax due, plus interest. It will also charge penalties where appropriate.
Entrepreneurs’ Relief reduces to 10 percent the CGT payable when all or part of an eligible business is sold.