The UK’s HMRC has issued a warning to companies about a tax avoidance scheme that involves using advertising and marketing expenditure to reduce taxable profits.
The scheme also disguises employment income as redeemable loyalty points, which the HMRC believes does not deliver the intended tax reliefs.
The company involved in the scheme claims the advertising expenditure is tax-deductible. However, at least 80% of this amount is returned to directors or employees as ‘loyalty points’.
The scheme operates by purchasing ‘advertising’ from the promoter, claiming a deduction for the expense, and reclaiming value added tax (VAT).
Directors or associates then receive loyalty points, which are converted to cash on prepaid cards for personal use.
However, the HMRC contends that the advertising expense may not be an allowable expense for corporation tax purposes, as it might not be incurred wholly and exclusively for the business.
Additionally, the input VAT might not be recoverable, and the loyalty points could represent taxable income for the directors.
This is in contrast to air miles or credit card points acquired by employees, which may not be taxable.
The HMRC said it “strongly advises” those using this or similar schemes to withdraw and settle their tax affairs.
It also suggested seeking independent advice or consulting with tax charities for help and guidance.
The HMRC also reminded scheme promoters of their obligations and potential sanctions for rule breaches.
This warning follows the HMRC’s recent update to its international manual, which provides guidance on the tax treatment of lump sum pension payments under the UK’s double tax agreements (DTAs).
The new guidance clarifies that, for most DTAs, lump sum and non-lump sum payments from pension schemes are generally treated similarly.
