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Where Taxpayers and Advisers Meet

Energy Supplier Referral Income Taxable?

TCA
Posts:30
Joined:Wed Aug 06, 2008 3:53 pm
Energy Supplier Referral Income Taxable?

Postby TCA » Wed May 30, 2018 11:24 am

An energy supplier’s ‘refer-a-friend’ scheme offers an existing customer a £50 account credit if someone switches to that supplier by way of the existing customer’s personal referral link. Is this referral income taxable? The vague guidance from the energy company suggests that if the credit is kept in the account and not withdrawn, it is not taxable, but refers customers to HMRC in any case.

Such guidance may be good on a small scale but what would be the case for a customer actively seeking referral uptake through a dedicated website and social media accounts, where excess credit was being regularly withdrawn from the energy account and the income involved would, for example, be sufficient to surpass the personal allowance?

Thanks for any assistance.

JRG
Posts:424
Joined:Wed Feb 03, 2010 4:40 pm

Re: Energy Supplier Referral Income Taxable?

Postby JRG » Thu May 31, 2018 10:28 am

In my opinion, an one-off account credit is actually a discount on the next bill, and therefore is not taxable.

As regards setting up a website to generate multiple account credits, the energy companies may have limits on the number of 'friends' you can refer, and HMRC may look at this practice as a business.

TCA
Posts:30
Joined:Wed Aug 06, 2008 3:53 pm

Re: Energy Supplier Referral Income Taxable?

Postby TCA » Thu May 31, 2018 12:17 pm

Thanks for your reply JRG. The energy company in question could of course scrap its referral scheme at any time, but for the moment there is no limit to the amount of referrals. I tend to agree that using a website to generate multiple referrals does seem like a commercial activity. I've no knowledge of tax law however hence my question.

Can anyone confirm - would the default position be to declare the income to HMRC under self assessment or is there any way to get a definitive answer from them in advance?

Any and all views appreciated.

TCA
Posts:30
Joined:Wed Aug 06, 2008 3:53 pm

Re: Energy Supplier Referral Income Taxable?

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.

JRG
Posts:424
Joined:Wed Feb 03, 2010 4:40 pm

Re: Energy Supplier Referral Income Taxable?

Postby JRG » Tue Sep 11, 2018 9:44 pm

If you refer a friend to your energy company and they give you money, or a discount on your bill, for doing so, then I would consider this to be a gift, and gifts are not liable to income tax.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Energy Supplier Referral Income Taxable?

Postby robbob » Wed Sep 12, 2018 9:46 am

what would be the case for a customer actively seeking referral uptake through a dedicated website and social media accounts, where excess credit was being regularly withdrawn from the energy account and the income involved would, for example, be sufficient to surpass the personal allowance?
This sounds like a trade to me and would taxed as such on the face of it - this scenario is completely different to one where you are only receiving a reduction in your bill - in this scenario you are making real cash profits drawn by you and the motives look pretty obvious in that there is a business here.


https://www.taxation.co.uk/Articles/2016/06/14/334917/got-badge

TCA
Posts:30
Joined:Wed Aug 06, 2008 3:53 pm

Re: Energy Supplier Referral Income Taxable?

Postby TCA » Fri Oct 26, 2018 2:13 pm

Thanks to both JRG and robbob for the replies.

Given the differences in opinion expressed in this thread and in the other forum replies I noted above, would it be an idea to write to HMRC and ask them directly? Or any other avenues to pursue?

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Energy Supplier Referral Income Taxable?

Postby robbob » Fri Oct 26, 2018 4:37 pm

Given the above (which seem to conclude the income is not taxable)
Hmmmm - my take is exactly the opposite of your take

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.

ref number 1 the answer advised
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.
Setting up a dedicated website to earn this commisson sound exactly along these lines IMHO - so answer 1 = taxable income.

ref number 2
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.
This quote is not consistent with what you have posted below which makes me suggest the person answering didn't twig this is is a vehicle to make you over 11k per year in income via a dedicated website rather than received a discount from your supplier invoices.

per op
here excess credit was being regularly withdrawn from the energy account and the income involved would, for example, be sufficient to surpass the personal allowance?
ref number 2
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.
Here they are pointing you down the rate of it being a trade - which sounds like they didnt realise (again) that you were earning over 11k per year.

i cant see that a specific website you set up with the intention to earn over 11k per year could be anything other than taxable income and that being of a trade.

Note this is just my opinion and there are others on here much more clued up on the legislation than me - so i would take my comments with a pinch of salt.

TCA
Posts:30
Joined:Wed Aug 06, 2008 3:53 pm

Re: Energy Supplier Referral Income Taxable?

Postby TCA » Fri Oct 26, 2018 5:13 pm

Thanks once again for your input robbob. Much appreciated.


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