HMRC publishes a spotlight where it has identified and has started to investigate a scheme that it believes has the features of tax avoidance. 

In Spotlight 61, HMRC describes a profit extraction scheme that is intended to work as follows:

• the company buys ‘advertising’ from the promoter of the arrangement;
• the company claims a deduction for the expense in calculating its profits subject to corporation tax and reclaims the VAT it has incurred;
• the company’s directors (or associates) receive loyalty points equal in value to at least 80% of the cost of the advertising;
• the promoter converts the loyalty points on a 1 point for £1 basis and credits the cash amount to prepaid cards; and
• the cards are made available for directors and associates to be used at their own discretion.

However, HMRC does not believe that the scheme delivers the intended tax reliefs as:

• the advertising expense incurred by the company may not be an allowable expense for corporation tax purposes as it is not incurred wholly and exclusively for the purposes of the company’s business;
• the input VAT incurred may not be recoverable; and
• the loyalty points represent taxable income for the directors. HMRC makes a distinction between the loyalty points acquired under these arrangements and air miles, credit card points, etc, that an employee acquires in the same way as any other member of the public and may not be taxable.

HMRC “strongly advises” users of this or similar schemes to withdraw from the arrangements and settle their tax affairs.  Help and guidance can be obtained from HMRC. HMRC also suggests that the user of the scheme considers getting independent advice or speaking to one of the tax charities. 

Furthermore, HMRC reminds scheme promoters of their obligations and explains the sanctions that HMRC may apply where there is a breach of the rules.