HMRC has issued a fresh warning to companies using marketing and advertising arrangements to extract profits while avoiding tax.
In Spotlight 68, the tax authority highlighted a scheme where businesses buy advertising services from promoters, deduct the cost for corporation tax purposes, and reclaim VAT. In return, directors or their associates receive loyalty points – typically worth at least 80% of the original expense.
These points are then converted into cash, credited to prepaid cards, and made available for personal use by the recipients. HMRC believes this setup is designed to disguise employment income and reduce taxable profits.
The authority states that such advertising costs may not be allowable for tax purposes if they are not wholly and exclusively for the business. It also questions whether the associated VAT can be reclaimed. Moreover, it argues that the loyalty points represent taxable income for the directors.
HMRC “strongly advises” users of the scheme to withdraw and settle their tax affairs. It also encourages users to seek independent advice or contact a tax charity.
Promoters are reminded of their legal responsibilities and warned that penalties may apply.
“We are investigating arrangements of this type and will challenge claims for tax relief where necessary,” HMRC said.
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