It claims to cut your tax bill by disguising your income, but help is available for those that want out
HMRC issued fresh guidance on Monday, March 31, cautioning about a recent scheme that it had been made aware of. It can allegedly reduce companies’ tax obligations and simultaneously return funds to company directors, employees, or associates.
The tax department has labelled this as a potential tax avoidance ploy and has explicitly stated: “People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and fees for using such schemes. HMRC’s view is that this scheme does not work, and we will challenge anyone promoting such arrangements.”
The scheme disguises income for company directors, thereby lessening their income tax liabilities while also allowing the company to reduce Corporation tax and claim VAT deductions.
The mechanics begin with a limited company purchasing ‘advertising’ from a promoter, the person running the arrangement.
The company then claims Corporation Tax and VAT input tax deductions for these ‘advertisement costs’.
Then, about 80% of the ‘advertising’ expenditure is converted into loyalty points which are allocated to the directors or associates.
The promoter then converts these points at a rate of one point to £1 in cash value. The funds are loaded onto a prepaid card given to the directors or their associates, allowing them free rein on spending.
Essentially, Directors participating in this scheme end up pocketing the majority of their ‘advertising’ spend after tax deductions and avoiding income tax, but HMRC has flagged this as a significant concern.
It stated: “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.”
HMRC is advising individuals involved in these or similar schemes to exit them and settle any outstanding tax issues. Those seeking assistance can contact HMRC at CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk, where support is available to rectify their tax situation.
Furthermore, HMRC issued a stern warning to those behind these schemes: “HMRC 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.”
The department also encourages the reporting of suspect tax avoidance schemes through their online form. Which can be submitted anonymously.
