Postby TCA » Sat Sep 08, 2018 11:36 am
I posted my query on another tax forum and got the two replies below. I am referred to as Customer.
Reply 1
To analyse Customer’s problem, let’s start with the proposition first. If an established commercial activity is carried out, any cost rebate – whether a direct cash payment or a credit on account of future purchases – should be subject to tax. Cash received would be taxable income of the trade, resulting from the associated activity of introducing a customer to a third party. An account credit would reduce the level of deductible expenses.
However, the first scenario, whereby an individual acting in a private capacity as a customer of an energy company receives a reward, requires a different analysis. The recent case of Hargreaves Lansdown Asset Management Ltd (TC6383) might assist. Basically, investment company Hargreaves Lansdown (HL) levied an annual management charge to its investors for its administration services. Further, HL offered a loyalty bonus to investors by way of a reduction of their management charges. HMRC sought to treat the bonus as taxable income of the investor. HL appealed.
The First-tier Tribunal set out four criteria, determined by case law, which must be met if a bonus were to be treated as an annual payment (which would make it taxable).
It had to be paid under legal obligation. This aligns with Customer’s client because the energy company had made the inducement a formal offer.
The payment had to be capable of recurrence. Although this was the case for HL’s investors – is it so for Customer’s? This key point is examined below.
It had to be income not capital in the hands of the investors. This was accepted as such for HL’s investors and similarly would be with Customer’s.
It had to be a pure income profit. It was on this point that HL scored and won its case at the tribunal.
For HL, the loyalty bonus could only reduce the management charges and this was made clear to its investors. The tribunal eventually agreed that did require some action by the investors. Note that HMRC might still appeal the HL decision.
Applying the above to Customer’s scenario there are two key areas.
First, are the payments capable of recurrence? The First-tier Tribunal quoted in the HL case ‘the payment must possess the essential quality of recurrence’ and it must be ‘capable of recurrence’. It seems from Customer’s information more likely to be a single offer with no presumption of recurrence, even though the company might well decide to make a similar single offer in the future. However, the wording of the offer should be checked to see whether recurrence is implicit.
Second, is it a pure income profit? This was described in the HL case as ‘at its most basic it is essentially income that is received without the person in receipt of that income having to do anything in return’. Customer’s case seems even clearer than HL’s. The energy company’s customer had to do something – find a friend to take out a contract with the company – to qualify for the credit, whether paid in cash or as a discount against their energy bill.
Thus, it should not be pure income profit, not an annual payment and not taxable on the customer. It would be interesting to ascertain the energy company’s view.
Reply 2
These schemes are becoming very common, but a quick inspection of the suppliers’ websites reveals little or no information about taxation. Let’s start from first principles. It is a fundamental of the UK tax system that to be taxable something must have a source. In the basic case of a supplier offering a credit to the account for an introduction there is no source; this is a simple discount on the bill. If that is correct, it is hard to see why the situation changes when the credit is withdrawn from the account. That seems to be the same as me getting a repayment of my gas bill if I have paid too much. So either both are taxable or neither is – my view is it is the latter.
The alternative analysis is that the income falls under the miscellaneous charging provisions in ITEPA 2005, s687 et seq, what I still think of as Case VI income. In Scott v Rickets 44 TC 303, Lord Denning held that, to be taxable under Case VI, there must be a payment under a contract (which would include an implied contract) under which services or facilities were provided. I suppose it could be argued that the arrangement with the supplier was a payment for services, but it still feels more like a discount to me.
The website question is interesting. It does feel more like a commercial activity but that is a question of scale rather than a fundamental difference in the structure of what is being done. The supplier is still giving a discount to a customer for referrals.
I cannot believe that HMRC would seriously be interested in bringing these people into self-assessment. In any event, presumably the new trading allowance would cover this.
The position on rebates is different with specific financial products when, certainly in the past, part of the investment return to the individual came in the form of a rebate. See HMRC’s Business Brief 04/13. The fact that the department felt it needed to clarify the position on trail commission is a good indication to me that normal rebates are not taxable.
My Follow Up
That particular forum is in a format which doesn't allow me to respond to these replies unfortunately and so I couldn't follow up directly. I would have replied as follows:
To Reply 1 - as to whether it's a 'single offer', the referral scheme is ongoing and could be withdrawn at any time, the referral bonus is not an annual payment but is a one-off payment per customer introduced
To Reply 2 – as to the scale, the referral income is greater than the personal income tax allowance, far exceeding any energy usage and therefore is being withdrawn to a bank account. I already complete a self-assessment return.
Given the above (which seem to conclude the income is not taxable) I'd be interested to hear any other viewpoints. I'd also like to know if there's a way to get a definitive answer from HMRC with regard to whether I should be declaring this as income or not. I don't want to fall foul of any laws but also would prefer not to just include this income in my tax return if there's a possibility I don't need to.
Any and all pointers much appreciated. Thanks.