HMRC has recently become aware of a tax avoidance scheme that attempts to avoid Income Tax and NIC by paying contractors in the form of redeemable loyalty points. Needless to say, HMRC is of the opinion that the scheme does not work and has published details in their Spotlights section on www.gov.uk to ward off those tempted to use it.
The contractor becomes an employee of an umbrella company and is then paid in two parts. In the first instance, a small basic wage is paid that attracts little or no tax and NIC. The second part of the payment is used to advertise the contractor’s services on a job board.
Loyalty points are immediately awarded to the contractor in return for them keeping their details on the job board. These points can then be cashed in by the employee shortly after, with no deductions for tax or NIC.
A third party runs the job board to which the contractor usually pays a substantial fee for doing so.
HMRC’s view is that this and similar schemes don’t work. Receiving and redeeming the loyalty points is taxable income in their opinion, which forms part of the freelancer’s employment income from the umbrella company.
HMRC will seek to tax the gross income, ie ignoring fees paid to the umbrella company and scheme promoter, leaving the contractor worse off because they will still owe the tax and NIC, plus interest.
Users of the scheme will be challenged by HMRC, as will the umbrella company, and have their tax affairs investigated.
HMRC will consider whether or not the General Anti-Abuse Rule (GAAR) applies. GAAR enables HMRC to counteract tax advantages arising from arrangements that are abusive and, where it applies, carries a penalty of 60% of the counteracted tax.
Users of this scheme are being encouraged by the Revenue to contact them and make arrangements to settle the tax and NIC as soon as possible. Failure to do so could result in interest charges and penalties.
HMRC can be contacted at firstname.lastname@example.org.
Tax returns should be completed on the basis that the payment to the job board is taxable income.