HMRC Spotlight 68 – loyalty points

HMRC has published details of a scheme that it believes is ineffective tax avoidance. The scheme involves loyalty points with the company buying “advertising” from the scheme promoter, claiming a tax deduction and claiming back VAT on the cost. The company directors then receive around 80% of the cost back in the form of loyalty points which are converted to money available to the director on prepaid cards.

HMRC explain that:

"Receiving and redeeming of such loyalty points provided by third parties involved in the arrangement is taxable income for the directors. These amounts should be accounted for as income of the director. 

Corporation Tax deductions claimed by the companies may also not be an allowable expense for tax purposes because they are not wholly and exclusively for the purpose of the business.

There could also be implications for the limited companies if they have reclaimed VAT incurred in relation to the use of this scheme as input tax, as it may not be recoverable".

As well as explaining, why in their view the scheme doesn't work, HMRC very helpfully explain that:

"This spotlight does not include the benefits an employee may acquire in the same way as any other member of the general public, for instance air miles, petrol tokens or credit card points acquired by buying goods or service on which such benefits are given. You can find out more in the HMRC Employment Income internal manual at EIM21618 — Particular benefits: air miles, credit card points etc."

EIM21618 explains that:

"In general, air miles, petrol tokens, credit card points etc. acquired by an employee are not taxable if they were acquired in the same way as applies to any other member of the general public, for instance by buying goods or services on which such benefits are given,

Provided the vouchers, air miles or points belong to the employee rather than the employer, they are not considered as being provided by reason of their employment even if the goods or services giving rise to them happen to be purchased as part of the employee’s business travel or using a credit card provided by the employer. (emphasis added)"

EIM21618 also provides an example of when in HMRC's view air miles etc. may be taxable:

"there is a tax charge on such items, if they are provided by reason of the employee’s employment.

This would be the case if the fact of the employment was a necessary antecedent condition to the receipt of air miles. An example of this would be where the employer purchased a block of air miles and distributed them to the employees, perhaps as part of an incentive scheme. Another example would be where there’s an arrangement for a third party to provide petrol tokens or some other form of award points specifically to employees of a particular employer but not to other customers.

It is important to remember that the exact tax treatment will depend on the facts of a particular case".