HMRC warns that ER-based avoidance scheme “doesn’t work” and will be challenged

HMRC warns that ER-based avoidance scheme “doesn’t work” and will be challenged

Tue 18 Oct 2016

HMRC have announced their view that a scheme that its promoters claim converts earnings of the owner/managers of trading companies, in particular personal service companies (PSCs) from income to chargeable gains which attract only the 10% entrepreneurs’ relief rate of CGT is “highly contrived” and ineffective.

The scheme seems to be based on the premise that it is possible for users to sell their company to another company, based offshore (Cyprus) in exchange for deferred consideration in the form of future payments based on earnings post-sale. In doing so it does its level best to risk HMRC attack on as many grounds as possible:

  • IR35- the scheme being based on charges for the user’s services provided to the acquiring company;
  • disguised remuneration- a relationship is created with a third party through which sums that would otherwise have been paid under PAYE and NIC are supposedly received as capital;
  • transactions in securities- profits of the PSC not paid as earnings would create distributable reserves;
  • artificial steps inserted solely or mainly for the purpose of obtaining a tax advantage- the Ramsay principle;
  • valuation of the deferred consideration- the amount a genuine arm’s-length buyer would pay for a company whose only or main asset is the owner’s personal earning capacity; and
  • sale of income stream legislation – this treats capital receipts as income in the year in which the property is sold.

The announcement states that “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.”

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