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Contractor guide to the tax treatment of loyalty schemes and benefits

Limited company contractors can use loyalty points and vouchers generated by company expenditure for personal purchases without fear of attracting a benefit in kind charge. That covers popular schemes like Nectar, Tesco Clubcard and Avios (the replacement Air miles scheme), as well as vouchers like ‘petrol tokens’.

“If a contractor buys business stationery in a supermarket that has a loyalty scheme, any personal benefits from the loyalty scheme, such as money off or days out, won’t be taxed,” explains James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP.

But Abbott warns there is a catch: “The loyalty scheme must be in the contractor’s given name, the scheme must be open to all members of the public and, according to HMRC’s guidance, it must ‘not [be] provided by reason of the employee’s employment’.”

Benefit in kind is usually based on the cost of a benefit to the business

According to Abbott, a benefit in kind tax charge on a benefit provided to a contractor by their limited company is usually based on the cost to the company of providing that benefit.

So, for example, the benefit in kind income tax and National Insurance Contributions (NIC) charge to a contractor for company healthcare insurance is based on the monthly cost of the insurance to the contractor’s company.

“There is no additional cost to a contractor’s company when a contractor uses their loyalty card when making company purchases; nor is there a cost when the contractor subsequently uses those loyalty points for personal gain.”

HMRC’s guidance confirms that there is no requirement to report loyalty scheme benefits on a P11D or self-assessment tax return. “Even if the contractor is using their company credit card to make company purchases in a supermarket, or buying flights that generate rewards using a company account, there is no tax charge,” he adds.

Contractors can’t award themselves loyalty points tax-free

As Abbott highlights, there is a catch, which is that a contractor can’t evade a benefit in kind tax charge if they create an employee benefit or incentive scheme purely for employees of their own limited company, ie themselves and a spouse or partner also employed by their company.

“In its guidance, HMRC uses the phrase ‘provided by reason of the employee’s employment’, which means that a contractor can’t buy a block of loyalty points in a scheme specifically to award to themselves and a spouse or partner.”

Even if the contractor is using their company credit card to make company purchases in a supermarket, or buying flights that generate rewards using a company account, there is no tax charge

James Abbott, Abbott Moore LLP

Any such incentive scheme would attract a benefit in kind tax charge that would be based on the cost of the scheme to the contractor’s limited company.

Schemes must be open to the public and loyalty cards must be held personally

A further catch is that if a loyalty scheme is not open to the public, like Nectar or Tesco Clubcard points schemes are, then a contractor will face a benefit in kind income tax and NIC charge. Again, the size of the charge will depend on the cost of the scheme to the contractor’s limited company.

Similarly, Abbott urges contractors to avoid corporate loyalty schemes, because the ‘points’, or incentives, then belong to the company and not the contractor, which causes complications: “When a contractor generates loyalty points using a personal loyalty scheme account, the contract employee owns the points, not the employer, which is the contractor’s limited company.”

HMRC makes it clear that the exact tax treatment of loyalty schemes depends on each specific case, and if a contractor benefits personally from corporate loyalty schemes, they may attract a benefit in kind charge depending on the value of that benefit.

Published: 22 April 2012

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