Tax avoidance schemes of years gone by were very different to what we see today. Generally, they relied on short comings in the legislation that could be exploited by skillfully restructuring a transaction that was likely to be undertaken anyway. They were often complex, and due to that, it was difficult for anyone who became involved in them to not know that they were seeking some kind of tax advantage. HMRC has done well to combat such schemes – and whilst I consider its current strategy to have shortcomings, it is of course right that it tackles tax avoidance with the tools it has been given by Parliament.
Perhaps because of this, today’s mass marketed schemes are much less sophisticated. Instead, they rely on a loose interpretation of legislation or HMRC guidance which, to most advisers, is not sustainable or justified. To the untrained eye, however, they create an illusion of logic such that it is hard to know if the transaction is one that HMRC will dislike or not. Like all good illusionists, the promoter ensures that they keep the crowd’s attention away from the obvious flaws in the trick, and draw their eye’s to only the bits that they want them to see. That is in the full knowledge that if they were to see behind the cloak, they might just spot how it really works and be disappointed.
One such scheme that has been doing the rounds and sold to owner-managed businesses in various flavours for a couple of years now is the ‘loyalty points scheme’.
What do points make? Not prizes
In essence, it is simple in its implementation. A business will purchase a service from the promoter such as marketing or advertising. The provider of that service will issue a ‘loyalty card’ to the director and award ‘loyalty points’ on the purchase, usually geared at around a return of 80% of the spend. Therefore, if £100,000 of advertising is purchased then £80,000 of loyalty points are allocated to the director. Those loyalty points can be converted to cash which is loaded onto a pre-paid credit card in the director’s name which can be used almost anywhere worldwide.
As you can see, the magician appears to have pulled off the trick of having a corporation tax deduction on one side, and a tax-free windfall for the director on the other. This is because the advertising spend is wholly and exclusively for the purposes of the trade and allowable, and no income tax is due on the loyalty points as per HMRC’s own guidance in its Employment Income Manual at EIM21618. Of course, they wouldn’t want you to fully read that page, so like the magician, I will repeat the useful part here:
‘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.’
It certainly seems like the trick is complete, and for a business owner not versed in tax, you can see how they could be fooled into offering a round of applause. For practitioners, though, it should be fairly obvious where the trick does not live up to the billing.
Firstly, has the business bought a service that was really worth 100% of what was paid? Given that the service provider could immediately rebate 80% of the fee paid, I would suggest not. The other 20% is a fee for implementing the scheme, and any actual marketing or advertising received is of little reach or value. Therefore, HMRC could disallow the deduction as not wholly and exclusively for the purposes of the trade. More likely though, it will allow the deduction and instead seek income tax and NICs on the monetary value placed on the credit card for the director.
The discretion given by EIM21618 is designed to not tax trivial benefits when staff, including directors, use a loyalty card when making purchases. Supermarket points, generally worth about 1p on every £1 spent, are the most obvious example, as well as airmiles. The receipt of either are not taxable as long as they are acquired in the same way as any other member of the public would. Clearly this is more for the sake of administration than any genuine attempt by HMRC to allow employees to have tax free perks. That is why EIM21618 also has this exclusion that the magician didn’t want you to see: ‘However, there is a tax charge on such items, if they are provided by reason of the employee’s employment.’
Now given that the loyalty point exemption outlined above is not a statutory disregard, and considering the significant value of the points, HMRC could take the view that the only reason the points were received was by reason of the persons employment and seek to tax them accordingly. That is a position, I think, on which a tribunal judge would have little difficulty finding for HMRC. After all, why did the company not simply ask to be given a discount on the services in return for forgoing the points?
There is also a third avenue for HMRC, and that is by way of the disguised remuneration rules in ITEPA 2003 Part 7A. It is reasonable for HMRC to suppose that the relevant step of paying a sum of money to the promoter, only to see it end up with an employee, is an arrangement that in essence is entered into wholly or partly as a means to provide reward or recognition to an employee. This would trigger an income tax and NICs charge on the sums received via the credit card as it would pass through the main case gateway provision for this anti-avoidance legislation.
As you can see, often the marketing material only tells half the story. When advising on any arrangement that is being marketed as a way to extract cash from a business without a corresponding tax charge, it is important to look at the arrangement in the round and not simply the marketing material. Only then can you play the part of the masked magician and let everyone in on the secret of how the trick really works.
