Loyalty Points as a Tax Avoidance Scheme

Turning Rewards into Untaxed Benefits – Why These Arrangements are the Opposite of Rewarding

A “loyalty points” scheme is a tax avoidance arrangement where a business buys goods or services from a promoter. In return, the promoter gives the company director high-value loyalty points. You can convert these points into cash on a prepaid card and spend them anywhere in the world, giving the impression of a legitimate business expense and a tax-free personal benefit.

How Does It Work?

Loyalty point schemes typically work like this:

A company pays a promoter for a service (e.g. marketing or advertising) at an inflated price. However, the real value of the service provided will realistically only amount to a small percentage of the overall cost.

The promoter then issues the company director with a ‘loyalty card’. This card is awarded with points worth around 80% of the service fee. These points can be redeemed for cash and loaded onto a prepaid credit card in the director’s name.

The idea is meant to see the company claiming the service cost as a corporation tax deduction, while the director enjoys what promoters claim is a tax-free benefit. It’s premise relies on HMRC’s general exemption for loyalty points. However, HMRC only intended this exception to cover trivial benefits that anyone could acquire, such as Clubcard points or air miles.

A (Not-So) Rewarding Scheme

Why It Doesn’t Work

HMRC can easily challenge this type of arrangement on several fronts. The “service” purchased from the promoter is often priced at poor value. If a promoter can immediately “rebate” 80% in loyalty points, is the service genuinely worth the full value? HMRC could argue the spend wasn’t wholly and exclusively for the purposes of the trade and therefore, disallow any corporation tax deductions.

Even if the deduction stands, the disguised remuneration rules can apply, treating the cash value of the loyalty points as income and therefore, subject to tax and National Insurance (NICs). In reality, promoters may advertise a clever tax loophole, but using it often leads to a large tax bill, interest charges, and penalties.

Protecting Your Tax Position

Loyalty points schemes may appear to be tax-efficient rewards, but in reality they operate like other tax avoidance schemes. Put simply, they just do not work. HMRC increasingly challenges these arrangements, often leading to costly tax investigations and potential penalties. If you or your business have taken part in such a scheme, seek professional tax dispute resolution support immediately to protect your position and limit your exposure.

At WTT, our Tax Investigations team handles complex investigations, escalates cases to litigation when needed, and guides clients through settlement negotiations with HMRC. For more information, get in touch with our experts today.