Received a gift card, loyalty reward or other incentive from a supplier? It may feel like a perk of doing business, but it can also have tax consequences. With Inland Revenue actively reviewing loyalty and incentive arrangements, now is a good time for SME owners to check how these rewards have been treated.
Supplier loyalty programmes are commonplace.
Buy goods or services from the same supplier, accumulate points or qualify for a promotion, and your business might receive a gift card, rebate or another reward.
For a busy business owner, these incentives can easily be treated as a bonus rather than something requiring the attention of your tax adviser.
But there is an important question to ask:
Has your business treated the reward correctly for tax purposes?
The issue is particularly relevant now. Inland Revenue has sought information from a customer loyalty programme provider about participating members and rewards from past periods. Programme participants have been advised that reward recipients may be contacted or selected for review to confirm that the correct tax treatment has been applied.
For SMEs receiving gift cards and other incentives through business spending, this is a timely issue to review rather than something to leave until Inland Revenue asks the question.
What is Inland Revenue’s position on trade rebates and gift cards?
The key point for SMEs is that a gift card received by a trade customer is income to that customer at the card’s face value. Different tax obligations may then arise if the reward is transferred to or used by an employee, shareholder-employee or shareholder.
In practical terms, a gift card obtained through business purchases should not be ignored simply because it is not cash or never appears in the business bank account.
Why is Inland Revenue reviewing loyalty arrangements?
Inland Revenue are likely to be concerned that rewards generated by business purchases may have been treated as tax-free perks.
They will be looking to identify taxable rewards that were left out of business income, as well as rewards used personally by owners or passed to employees without the appropriate tax treatment. Information held by a programme provider can help Inland Revenue identify recipients and decide where further enquiries may be warranted.
The issue is therefore not simply whether a business received a reward, but whether it correctly accounted for that reward and any subsequent benefit provided to an individual.
What if you use the gift card or reward personally?
Consider a common situation.
Your company regularly purchases goods from a supplier. Those purchases generate rewards, and the business receives a gift card. You are a shareholder-employee and use the card for personal purchases.
It may feel as though the supplier has rewarded you for being a loyal customer.
But the reward arose from purchases made through the business.
That creates two tax questions:
- How should the reward be treated when the business receives it?
- What happens when the resulting benefit is passed to, or used by, the owner?
A gift card received by a trade customer is treated as income to that customer at its face value. Where a product has been received as a reward, the value is not automatically the retail price of that product but rather the realisable, second-hand value.
If supplier rewards have been used personally by the business owner it would be common for this to be treated as drawings however this isn’t always the case.
What if the reward goes to an employee?
Passing a reward to an employee does not make the original transaction disappear. It may introduce an additional tax obligation.
Employer-provided gift cards can involve PAYE or fringe benefit tax considerations. The applicable treatment can depend on the type of gift card or reward and the rules applying when it is provided.
This employment tax issue should be considered separately from the income tax treatment when the business first receives the supplier reward.
Don’t assume the issue stops with one loyalty programme
Although recent Inland Revenue activity has involved information held by a loyalty programme provider, businesses should not assume that the issue is confined to one programme or only to current-period rewards. Inland Revenue can seek historical information about programme participants and the rewards they have received.
Gift cards and similar rewards received from merchants or suppliers may therefore need to be checked to establish whether they have been recorded and returned correctly.
For an SME owner, that makes a broader review worthwhile. Think about the suppliers your business has dealt with in previous income years as well as the current year.
Has the business received:
- Gift cards
- Supplier loyalty rewards
- Promotional incentives
- Points exchanged for rewards
- Other non-cash incentives?
If so, can you establish how those rewards were treated for tax and who ultimately used them?
Five things SME owners should check now
You don’t need to wait for Inland Revenue to ask the question.
1. What rewards has your business received?
Look across suppliers and loyalty programmes, not just the largest or most obvious one.
Include non-cash rewards that may not appear in the company’s bank transactions.
2. How were those rewards treated for tax purposes?
Establish whether each gift card or other relevant reward was captured in the business’s tax records and treated appropriately.
3. Who ultimately received the benefit?
Did the reward stay with the business, or was it used by an employee, shareholder-employee or shareholder?
Different obligations may arise depending on who received or used the reward.
4. Do you have the supporting records?
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Gather information showing:
- Which supplier or programme issued the reward
- When it was received
- Its value
- Who used it
- Whether it was used for business or personal purposes
- How it was treated for tax.
Complete records will make it considerably easier to establish and support the treatment adopted.
5. Have you checked previous years?
Don’t limit the review to rewards received this month or during the current income year.
Inland Revenue may seek information relating to rewards received in earlier periods. Reviewing the historical tax treatment of supplier rewards may therefore be worthwhile, particularly where rewards were not recorded through the business’s bank account.
If something does not look right, speak with your tax adviser about the appropriate next step rather than attempting to correct the position without advice.
Why this matters for SMEs
Supplier reward programmes are not themselves the problem.
The risk is that the tax treatment of a reward receives less attention than the underlying business purchase.
It is easy to see how that happens.
The supplier invoice enters the accounting system. The company pays it. Months later, a gift card arrives and is used by the owner or passed to an employee.
Because the benefit sits outside the normal flow of cash through the bank account, it can be overlooked.
Inland Revenue’s position and its current review activity provide a timely reminder that non-cash does not necessarily mean non-taxable.
For SMEs, the appropriate response is not alarm. It is having complete records and confidence that the tax treatment reflects what actually happened.
Time for a quick check?
If your business receives supplier gift cards, loyalty rewards or similar incentives, ask:
- What have we received?
- What was each reward worth?
- How was it treated for tax?
- Who ultimately received the benefit?
- Do we have records supporting that treatment?
- Have we reviewed previous income years as well as the current year?
If you cannot answer those questions confidently, now is a sensible time to investigate.
Moore Markhams can help you review the tax treatment of supplier rewards and incentives, identify areas requiring closer attention and determine what action is appropriate for your circumstances. Contact your local Moore Markhams adviser to discuss your position.
