Do you need to pay tax on loyalty points and cashback?

Cost of living

With the cost of everyday goods and services rising faster than wages it’s no wonder the use of cashback websites such as QuidCo and TopCashback has skyrocketed. Add to that retailer loyalty points and credit card rewards and it can feel like you’re getting a good deal. It would be daft not to take advantage of every possible reward for spending but could doing so with business expenses land you with a tax bill? HMRC has published guidance on this point, and the tax treatment differs depending on whether the recipient is an employee or business. Individuals making purchases unconnected to their employer or business are not taxed on cashback or other rewards.

Tax-free perks for employees

Cashback and other perks such as airmiles are tax free for individuals, even when they’re being earned by making business purchases that are later reimbursed by their employer. There is an exception for cashback and other rewards provided by reason of employment; this will always be taxable as employment income.

Example. If you hit your targets at work and your employer gives you airmiles as a reward, this is taxable as it is provided by reason of your employment.

The guidance confirms that where vouchers, airmiles or points belong to the employee rather than the employer, they are not being provided by reason of their employment even if they are paying for business expenses or using a credit card provided by their employer.

Taxable cash for businesses

Cashback paid to a business is taxable as trading income. This is the case whether the business is run by a company, partnership or sole trader.

If you take out a loan to fund your business as a sole trader or partner this is a personal loan and any cashback you receive does not belong to the business and is therefore tax free. In this context a property rental business also counts as a business.

Example. Andrew owns several rental properties and needs to buy brand new white goods for each of them. Andrew makes the purchases via a cashback website. When the cashback is paid out, it belongs to the property business and should be brought into account as a taxable receipt.

Discounts and deductions

However, if a business is given a discount at the point of sale, this is not a taxable receipt and, instead, the deductible expense is reduced to reflect the amount paid.

Commission

The bulk of HMRC guidance on the matter is concerned with commission payments. This is where typically a business or individual is paid for introducing new customers, e.g. self-employed insurance, travel agents or social media influencers. As you would expect, such payments are ordinarily taxable business receipts although a corresponding tax deduction may be available if part of the commission is passed on to the new customer as a condition of entering into the transaction.