The HM Revenue and Customs (HMRC) has issued a stark warning regarding a new scheme that claims to reduce a company's Corporation Tax liabilities while simultaneously returning funds to directors, employees, or associates. This guidance, released on Monday, March 31, 2025, highlights concerns that this arrangement could be classified as tax avoidance, potentially leading users to face significant financial repercussions.
According to HMRC, the scheme does not function as promised and could result in individuals paying more in taxes than they initially sought to avoid. The department emphasized, "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." This warning underscores the risks associated with attempting to exploit perceived loopholes in the tax system.
The mechanics of the scheme involve disguising income for company directors, thereby allowing them to reduce their income tax liabilities while also enabling the company to claim Corporation Tax and VAT deductions. The process typically begins with a limited company purchasing 'advertising' services from the promoter of the scheme, who orchestrates the arrangement.
Once the advertising is purchased, the company claims Corporation Tax and VAT input tax deductions for these costs. Remarkably, around 80% of the expenditure on 'advertising' is transformed into loyalty points that are allocated to the directors or their associates. The promoter then converts these loyalty points at a rate of one point for £1 in cash value, which is subsequently loaded onto a prepaid card. This card is made available for the directors or their associates to utilize at their discretion.
While it may seem advantageous, HMRC has flagged this scheme as problematic. The department stated, "Receiving and redeeming of such loyalty points provided by third parties involved in the arrangement is taxable income for the directors." This means that directors must account for these amounts as personal income. Additionally, HMRC pointed out that the Corporation Tax deductions claimed by companies may not be permissible as allowable expenses since they are not considered wholly and exclusively for business purposes.
For individuals currently participating in these schemes, HMRC is urging them to withdraw and settle their tax affairs promptly. Those who believe they are involved in such arrangements and require assistance can reach out to HMRC via the email address [email protected], where support is available to help rectify their tax situations.
HMRC's warning extends to those orchestrating these schemes, stating, "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." This declaration signals a firm stance against tax avoidance practices and highlights the department's commitment to enforcing tax laws.
Moreover, HMRC encourages the public to report any suspected tax avoidance arrangements, schemes, or promoters through their online reporting form, which can be submitted anonymously. This initiative aims to enhance transparency and accountability within the tax system while deterring potential offenders.
The implications of engaging in such tax avoidance schemes can be severe, not only financially but also legally. Individuals and companies found to be using these arrangements may face substantial penalties, interest on unpaid taxes, and potential legal action from HMRC. Therefore, it is crucial for anyone considering these schemes to weigh the risks carefully against the supposed benefits.
As the tax landscape continues to evolve, the HMRC's guidance serves as a reminder of the importance of compliance with tax regulations. It also highlights the necessity for individuals and businesses to seek legitimate avenues for tax relief rather than resorting to schemes that could ultimately lead to greater financial burdens.
In conclusion, the HMRC's recent warning regarding tax avoidance schemes underscores the importance of adhering to tax laws and regulations. Individuals and businesses should remain vigilant and informed about the risks associated with such schemes and prioritize settling their tax affairs in accordance with HMRC guidelines.
