Profit Extraction via Prepaid Cards & Loyalty Points

Heard about this latest tax avoidance issue currently being challenged by HMRC ?

Have you heard about using prepaid debit cards for profit extraction to reduce the profits or disguise the income of a business. Well, HMRC have now published details about it and are on the trail of those using this widely promoted scheme.

HMRC are now aware of arrangements that users claim work, to reduce their business profits and HMRC of course disagree and have made it clear in the guidance on Gov.uk (Spotlight 68) that they will not tolerate this form of what they deem to be tax avoidance.

So have you have been approached about such a scheme, or have you been sold one already as something that you may be persuaded works within your business.

The premise of the scheme being marketed purports to reduce a company’s corporation tax liabilities by including expenditure in the accounts for advertising – thus reducing profits. The company claims it as an allowable expense but an amount equal to at least 80% of that amount claimed for advertising, is then returned personally to the directors or other nominated employees, in the form of loyalty points.

However, the loyalty points do not stop there, they are immediately converted into monetary amounts charge to prepaid debit cards issued in the names of individual directors or their associates. Those people are free to use the prepaid cards to spend the amounts and the scheme will advise you that those loyalty points are not taxable on the Director or recipient.

HMRC believe that the scheme does not work and will challenge anyone promoting such arrangements. People who use those arrangements are certainly likely to have to pay more than the tax they tried to avoid as well as paying interest, which these days can be punitive as interest rates have risen recently and penalties and high fees are also charged to the users of such schemes.

The Revenue’s guidance explains more, but quite simply limited company would buy advertising from the promoter of the arrangement and the company claims corporation tax, and VAT input tax relief, in respect of those advertising costs incurred.

The company directors or nominated associates then receive an amount typically equal to at least 80% of those advertising expenses in the form of loyalty points.
These loyalty points are converted on a one for £1 basis in cash and charged to a prepaid card.

Cards are made available for directors et cetera to be spent and used at their own discretion.

HMRC are telling you not to use such arrangements as receiving and redeeming such loyalty points provided by third parties is taxable income for the directors and these amounts should be accounted for as income of the director or user and charged to tax and NIC, and HMRC are also challenging the corporation tax deductions claimed by the companies as not allowable because they are not exclusively laid out for the purposes of business.

There will also be implications for limited companies if they’ve reclaimed VAT, so care needs to be taken if you think you have maybe been involved in such a scheme.

Call us and we will try to unravel it simply for you and make the disclosure HMRC are inviting.

It may be some time before all of these investigations filter down to to the companies involved but remember HMRC can go back many years to recover the tax so for them there is no rush.

The government through recent budgets have made it clear that they will not tolerate tax evasion or avoidance and are employing many more officers to recoup lost tax for the Crown and this is one way they intend to do so, and they have published their intention and guidance on this.

Contact us if you think you may have been involved in such a scheme and also always remember that HMRC say in such schemes that if it sounds too good to be true it usually is!

Call us as always on the numbers below in complete confidence or pop in to see us to see what might be at stake for you and your business, as in this day and age it could be that the tax, interest and penalties involved could be a serious liability for your business as well as for you and your family personally — and in the current economic climate you may prefer to settle your liabilities now rather than let them mount up massivley for the future.

Call Andy Rusling on 07879 464577 or Lindsay Henson on 07584 706664 for advice or fixed price for the work needed.