Global Daily Tax News, UK Warns On Pre-Payment Card Tax Avoidance Scheme, (Apr 21, 2025)

The UK tax agency has issued a warning regarding a tax avoidance scheme involving the purchase of prepaid debit cards.

In Spotlight 68, HMRC draws attention to a scheme that uses advertising and marketing expenditure to reduce profitability and disguise income in the form of redeemable loyalty points. HMRC's view is that the scheme does not work and intends to challenge anyone promoting such arrangements. It said taxpayers who use these arrangements may have to pay more than the tax they tried to avoid, as well as paying interest and penalties, and fees for using such schemes.

The scheme is aimed at reducing companies' corporate tax liabilities by including expenditure for "advertising" in the profit and loss account. In the scheme, the taxpayer claims this expenditure is tax deductible. However, an amount equal to at least 80 percent of the amount spent is returned personally to the directors or employees in the form of "loyalty points".

These "loyalty points" are immediately converted to monetary amounts charged to prepaid cards issued in the names of the directors or their associates. The directors of the companies or their associates, or both, use the prepaid cards to spend the amounts. It is claimed that these "loyalty points" are not taxable income for the directors and associates.

HMRC said: "The arrangements are designed to enable profit extraction and avoid payment of income tax by allowing the company directors to disguise money they receive and reduce their tax liabilities. It also seeks to claim Corporation Tax and VAT input tax deductions for the company."

According to the Spotlight, the arrangement typically features the following steps:

• A limited company buys "advertising" from the promoter of the arrangement;

• The company claims Corporation Tax and VAT input tax in respect of "advertisement" costs incurred;

• The company directors (or their associates) receive an amount often equal to at least 80 percent of the "advertising" spend in the form of loyalty points;

• These loyalty points are converted by the promoter on a one for GBP1 basis cash amount, which is charged to a prepaid card; and

• The cards are then made available for directors and associates to be spent or used at their own discretion.

HMRC has said: "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."

It concluded: "There could also be implications for the limited companies if they have reclaimed VAT incurred in relation to the use of this scheme as input tax, as it may not be recoverable."