Payroll rewards schemes: the two tax questions hiding underneath

Author

Minhaz Moosa, Founder, Intelligent Payroll

The pitch landed on my desk looking like free money. A borderless payroll platform wanted us to push all our clients’ payrolls through them. The wages would run through their card loop, we’d earn millions of air miles, and we wouldn’t need to do anything differently.

I’ll be honest, for about five minutes it was tempting. Then I looked at how the numbers worked, and at who we’d actually be dealing with. The company wasn’t even registered on Companies House. We walked away.

A few months later, one of our own clients left us for a scheme like it. The director wanted the air miles, and I understood why. When I sat down with him and walked through the analysis behind this article, he decided to come back.

The requests come from the client side too. An accountant emailed us last month asking whether we could reconfigure a client’s payroll file so they could pay wages through a rewards platform. A reasonable ask, and technically the answer is usually yes. But it’s worth knowing what the client is signing up to before you reconfigure anything.

So this isn’t a theoretical piece. Clients ask us about payroll rewards almost every week, and the answer depends entirely on how the scheme works. There are two quite different tax questions hiding inside these arrangements. One is about VAT. The other is about whether company-funded rewards are a taxable benefit for the person who gets them.

Start with the wages

If a business employs its own staff, the wages and employer’s National Insurance are its own employment costs. They aren’t consideration for a supply of labour to itself, so there’s nothing there to charge VAT on.

It helps to separate three arrangements.

In the normal bureau model, the client employs the staff and the bureau charges VAT on its service fee. If the bureau also moves the wage money, that doesn’t automatically make the wages part of its taxable fee. The treatment depends on the contract and, where disbursement treatment is claimed, whether HMRC’s conditions are actually met.

In a genuine supply of staff, an employer of record or agency legally employs the workers and supplies them to the client. The remuneration can then form part of the consideration for a taxable supply, so VAT can apply to the full charge. Whether the client can recover it depends on its own input tax position. But the client is no longer the employer, and that changes a great deal around control and responsibility.

The third arrangement is the one that fails. The client stays the employer in every practical sense, but an invoice charges VAT across the gross salary bill as if it were a supply of staff. The client reclaims it. That VAT was charged in error, and HMRC won’t treat it as input tax.

The problem with some rewards-led pitches is that the third arrangement is dressed up as the second.

Question one: VAT on the wage bill

You can’t normally pay salaries on a credit card. So to earn points, the platform invoices the business for its wage bill and the business pays that invoice by card. Some schemes then add VAT and tell the client to reclaim it, which makes the whole thing look cost-neutral.

Here’s what that means in practice. Take a £1 million annual payroll. Add 20% VAT and the card spend becomes £1.2 million. On a business card earning 1.25 Avios per £1, that’s 1.5 million Avios. Even at a generous 1p each, you’re looking at around £15,000 of flights.

If the client is still the employer, the £200,000 VAT charged on its own wage bill isn’t recoverable as input tax. That’s a £200,000 exposure, plus interest and potential penalties, for £15,000 of travel. The VAT reclaim is what makes the economics work. Take it away and the maths collapses.

This is the conversation I had with the director who left us. He hadn’t looked at the VAT at all. He’d been sold the miles.

The tribunal has just tested this

In September 2026, the First-tier Tribunal published its decision in Its Plant-Tech Ltd v HMRC [2026] UKFTT 1299 (TC). A wind sector maintenance business handed its payroll to outside payroll companies in 2019. Those companies invoiced for gross wages, employer’s NI and fees, with VAT on the lot, and the business reclaimed all of it.

HMRC disallowed most of the claim and assessed £569,175 for June 2019 to March 2022. The business argued its staff had transferred to the payroll companies. The tribunal disagreed.

The detail is worth reading, because it’s exactly what HMRC would look at in any of these schemes. The business carried on hiring, handling grievances, paying for training and directing the work. It paid net wages from its own bank account. Nothing material in the working relationship had changed, so the tribunal found the staff had not moved.

The invoices didn’t help either. They separated wages, employer’s NI and a processing fee, which is consistent with payroll administration rather than a supply of labour. The invoice format was only evidence, though. It was the wider employment relationship that decided the case.

The director genuinely believed his staff had transferred, apparently because that’s how the arrangement had been sold to him. With little documentary evidence and the burden of proof on the business, his belief wasn’t enough to establish that anything had actually changed.

There’s one more point bureaus should notice. HMRC had previously assessed one of the payroll companies for output tax before withdrawing that assessment, and that did nothing to establish the customer’s right to deduct the VAT. A supplier’s VAT treatment doesn’t decide the customer’s position. If you’re the bureau that introduced the arrangement, don’t assume the problem stays with the client.

Question two: rewards the company pays for

A newer type of platform avoids VAT altogether. It earns its money from fees, and the rewards come from the platform rather than a credit card.

Some of these platforms operate as FCA-authorised e-money institutions. You upload the payroll file, approve the run, and the platform pays each employee from funds you provide. There’s no invoice for wages, so there’s no VAT-on-wages issue of the kind in Plant-Tech.

The tax question sits elsewhere. On one platform we reviewed, the business opts in on each payment run and pays an extra fee of around 1.5% to 3% to earn points that convert into airline and travel schemes. The business pays the fee, but the points go into the personal account of whoever processed the payment. The platform’s terms leave any employment tax with the business, and any personal tax with the individual.

HMRC’s guidance at EIM21618 says air miles and points generally aren’t taxable where they belong to the employee and are acquired the same way any member of the public would get them, even on business spend. They can be taxable when provided by reason of employment. HMRC’s own example is an employer buying a block of air miles and handing them out to staff.

A business paying a specific fee so that points land with its director or employee looks a lot closer to that taxable example than the exempt one. If it does create a taxable benefit, the valuation and reporting would need to be worked out under the benefit-in-kind rules. The fee is clearly relevant, but it shouldn’t just be assumed to be the taxable value. For an owner-managed company, that could mean payroll or P11D treatment and potentially Class 1A NIC. A PAYE Settlement Agreement may be an option where the conditions are met. No tribunal has looked at this model yet, so the position isn’t settled. It’s a question to answer before you switch rewards on.

The value is worth checking too. At a 1.6% fee for 1 point per £1, and valuing each point at 1p, you’re paying 1.6p for every 1p of points. On a £20,000 monthly payroll, that’s £320 a month. The numbers only stack up if you redeem well above that value, and before any tax.

None of that makes these platforms bad payment tools. It just means a regulated provider can still leave the tax questions with you.

What I’d check as a bureau

Start with your own invoices. If you’re VAT registered, VAT goes on your fee. If you move wage money for clients, keep it clearly separate on invoices and in your terms, and don’t assume disbursement treatment without checking the VAT Notice 700 conditions. If you’ve ever shown VAT on wage funding, take advice now. You may need to issue credit notes and, if you accounted for the VAT, claim it back to reimburse the client within the four-year limit.

Look hard at who you’re dealing with. The platform that approached us failed the most basic check. Before your name goes anywhere near a rewards or borderless payroll platform, find out whether it’s properly registered, how it invoices end clients, and who ends up with the rewards. When a scheme unravels, clients remember who introduced it.

Be clear with clients about how their money is held. Where a platform holds funds as safeguarded e-money rather than bank deposits, FSCS deposit protection generally doesn’t apply. That’s normal, but clients should know, and liability terms are often capped well below the value of a payroll run.

Nobody at your firm should earn personal rewards from a client’s money. Some platforms already exclude connected accounting and bookkeeping users, and that’s the right principle for any platform.

If you work with agencies or umbrella companies, the risk is different again. In Red Rose Payroll, HMRC tested what a payroll business knew or ought to have known about its supply chain. The tribunal allowed the appeal because HMRC hadn’t established the knowledge test, but the lesson isn’t that due diligence is a safe harbour. It’s that you need evidence of what you checked, what you knew and how you responded to warning signs. Since 6 April 2026, recruitment agencies and, in certain circumstances, end clients also face joint and several liability for PAYE failures in umbrella company chains.

And know your advice boundary. If the answer turns on specialist VAT or employment tax analysis, say so, and put the question to the right adviser in writing.

What employers should ask

If someone tells you that you can reclaim VAT on your salary bill, ask whether a separate business has genuinely become the legal employer. That means new contracts, a proper transfer, payslips and RTI under its own PAYE scheme, wages paid from its own bank account, and that business directing the work and carrying the employer’s legal duties. If nothing has really changed, don’t assume the VAT is recoverable. If you’ve already claimed it, speak to your accountant and go back to the supplier for a credit note. Don’t wait for an inspection.

If a platform offers rewards for a fee, ask who gets the points, whether you’ve taken advice on the benefit-in-kind position, whether the fee carries VAT, what the points are realistically worth, and where your wage money sits before pay day.

Points aren’t the problem

Earning points on genuine business spend is fine. Paying your bureau fee or your software subscriptions by card and collecting the rewards is ordinary, VATable business expenditure.

The problems start when a scheme manufactures a VAT charge on your own wages to create card spend, or when company money buys points for an individual and nobody asks about the tax.

The director who came back to us didn’t need persuading that air miles were nice. He needed someone to show him what the invoice was really doing. That’s the job. The risk with these schemes is that nothing looks wrong until the day HMRC starts asking questions.

This article is intended as general information for payroll professionals and employers. The VAT and employment tax treatment of any arrangement depends on its facts, and specialist advice should be taken where appropriate.

Minhaz Moosa is the founder of Intelligent Payroll, a Manchester-based payroll bureau and HMRC Authorised Tax Advisor. Intelligent Payroll offers a payroll payment service to clients through an FCA-authorised provider and doesn’t offer rewards on payroll payments.