HMRC have published Tax Avoidance Spotlight 68 'Using prepaid debit cards for profit extraction to reduce profits and disguise income', highlighting a scheme that uses purported advertising and marketing expenditure to reduce profitability and disguise income through redeemable loyalty points.
The arrangements
The arrangements typically work as follows:
- A limited company buys ‘advertising’ from the promoter of the arrangement.
- The company claims Corporation Tax relief and recovers input VAT on the ‘advertisement’ costs incurred.
- The company directors (or their associates) receive loyalty points, often equal to at least 80% of the ‘advertising’ spend.
- The promoter converts the loyalty points on a £1 to £1 basis for cash, which is put on a prepaid card.
- The cards are then made available for directors and associates to be spent or used at their own discretion.
It is claimed that these ‘loyalty points’ are not taxable income for the directors and associates.
- HMRC's view is that the receipt and redemption of such loyalty points in the arrangement is taxable income for the directors.
HMRC also state that:
- The Corporation Tax deduction claimed by the company may not be an allowable expense because it might not be Wholly and exclusively for the business.
- The input VAT incurred on the 'advertising' expenditure may not be Recoverable.
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 services on which such benefits are given.
What to do if you are using this arrangement
HMRC recommend that anyone using the arrangements described withdraw and settle their tax affairs. This might involve getting independent tax advice.
Promoters
The spotlight reminds promoters of the scheme that they must disclose it to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or face penalties of up to £600 per day.
In addition, HMRC:
- Can Publish information about tax avoidance schemes and the people involved in their supply and marketing.
- Will pursue anyone who promotes or enables tax avoidance. This includes using the Enablers penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
- Will also use their powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.
Useful guides on this topic
Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
Wholly and exclusively…toolkit
When is an expense allowed for tax purposes? What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there?
HMRC Tax Settlement Facilities 2024-25
HMRC provides special tax settlement facilities and opportunities to allow taxpayers to notify undeclared income or gains over a range of different taxes. Facilities are provided via special links to enable taxpayers to settle unpaid taxes.
Anti-avoidance: HMRC's spotlights
What are HMRC's Spotlights and where can you find them?
Promoters of Tax Avoidance Schemes (POTAS)
Who is a Promoter? What are the Promoters of Tax Avoidance Scheme rules? What does this mean for promoters, intermediaries and clients?
DOTAS: Disclosure of Tax Avoidance Schemes
What are the Disclosure of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
Penalties: Enablers of Tax Avoidance (subscriber version)
What penalties apply to Enablers of Tax Avoidance? When do they apply? Who is an enabler?
Named tax avoidance schemes, promoters, enablers
HMRC publishes a list of named tax avoidance schemes, promoters, enablers and suppliers. It is not recommended that taxpayers use any of these schemes, as HMRC does not consider that they work and you may end up with a significant tax liability if you engage with the scheme suppliers.
External link
HMRC: Using prepaid debit cards for profit extraction to reduce profits and disguise income (Spotlight 68)
