Taxpayers, including contractors, have been warned by Her Majesty’s Revenue and Customs (HMRC) not to use any tax avoidance schemes that exploit entrepreneurs’ relief.

HMRC’s alert, divided into four parts, warned against using schemes that aim to turn income into a capital gain, which then attracts entrepreneurs’ relief (ER), cutting income tax and national insurance liability.

However, the alert has been criticised for describing the schemes to exploit capital gains tax relief and ER in a short and simplistic manner.

HMRC describes it as an individual selling beneficial ownership of their company to an entity based in Cyprus, and then becoming an employee of that entity. The individual remains as a director of their company, and the company continues to invoice for the individual’s services, despite the individual now being an employee of an entity in Cyprus.

Those promoting the scheme claim the monthly payments the individual receives will be taxable as a capital gain tax at 10 per cent after entrepreneurs’ relief has been claimed.

WTT Consulting, a tax dispute firm, says the detail HMRC has provided on the steps of the scheme, which are intended to help people to steer clear of them, is inadequate.

“[HMRC] should ideally point out existing hurdles, establish boundaries imposed in previous case and pinpoint HMRC’s opposition to the scheme,” WTT Consulting’s Graham Webber said.

“And should or could we expect a deeper description [that] might serve to shed some light?” he asked. “This in turn would portray a more robust HMRC approach.”

Webber is also concerned that, by not describing the tax situation fully, HMRC is also jeopardising genuine ER claims.