A new scheme is reportedly claiming it could reduce your tax liability through an advertising loophole
A new scheme is reportedly claiming it could reduce your tax liability through an advertising loophole
HMRC issued new guidance on Monday, March 31, warning of a scheme it’s been made aware of that claims to lower a companies Corporation Tax liabilities while returning money to the company’s directors, employees or associates.
The department warned this ‘loophole’ doesn’t actually work and could be classed as tax avoidance.
It warned: “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 is designed to disguise income for company directors, therefore reducing the income tax they owe while also getting Corporation tax and VAT deductions for the company.
It usually starts with a limited company buying ‘advertising’ from the person or organisation running the arrangement, known as the promoter.
The company claims Corporation Tax and VAT input tax for these ‘advertisement costs’. Then, around 80% of the ‘advertising’ spend is turned into loyalty points provided to the company directors or their associates.
These points are converted by the promoter on a one for £1 cash amount. This is charged to a prepaid card which is then made available for directors or their associates to use at their whim.
Essentially, the directors could receive the majority of their ‘advertising’ spend back in their pockets after getting the tax deduction and dodging income tax.
However, this is the biggest issue with the scheme as HMRC pointed out: “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.”
For people who are in these schemes, or similar arrangements, HMRC urged that they withdraw from it and settle their tax affairs with the department.
Those that think they’re in one of these schemes and need help getting out can use the email address CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk as the department does provide support to help you get back on track.
For those orchestrating the schemes, the department’s warning is clear: “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.”
You can also report tax avoidance arrangements, schemes and promoters by using the online reporting form. This can be made anonymously.
