Air miles on your payroll:
The VAT trap behind borderless salary schemes
We are getting the same question from clients almost every week. Can you pay staff salaries through a card or platform that earns Amex points or Avios, so the business collects air miles on money it was going to spend anyway? On the surface it sounds like free flights for doing nothing new. Underneath, some of these schemes carry a VAT risk that could cost far more than any reward. We recently looked at a deal built on exactly this structure and walked away from it. Here is what we found, and why we said no.
The pitch, and why it is tempting
A growing number of global and borderless payroll platforms now market airline rewards as a selling point. The hook is simple. Route your whole payroll, meaning the full gross salary bill, through their card or credit loop, and earn points on every pound. Some pitches quote several Avios or reward points per pound spent. On a business with a seven-figure annual wage bill, that adds up to a lot of points and, potentially, a lot of flights.
We understand the appeal. The problem is the mechanism they use to make the numbers work.
The part that breaks: VAT on salaries
To push your entire salary sum through a card loop, some providers issue an invoice that adds 20% VAT across your total salary spend, then tell you to reclaim that VAT as input tax. That is where the structure falls apart.
If you are the legal employer, your employees’ wages are outside the scope of VAT. Paying your own staff is not a taxable supply. There is nothing to charge VAT on except the provider’s processing fee. In a normal payroll arrangement, the only VATable supply is the bureau’s service fee. VAT on that fee is correct and reclaimable. VAT on the wages themselves is not.
The disbursement rule, in plain English
Providers sometimes lean on the idea of a disbursement to justify passing costs through with VAT attached. Under VAT Notice 700, section 25, a payment can only be treated as a disbursement where the provider acts purely as your agent, paying a genuine third party on your behalf, and a strict set of conditions is met.
Your employees are not a third party to your business. You employ them. Their pay is your cost, not a third-party bill routed through an agent. The disbursement route simply does not fit an employer paying its own staff.
Two legitimate models, and the one that is not
It helps to separate three arrangements, because only one of them is the problem.
- You employ your staff. Your provider processes the payroll and charges VAT on its service fee only. The wages carry no VAT. This is the standard, correct model.
- An employer of record supplies staff to you. Here a provider legally employs the workers and supplies them to you. That is a supply of staff, and VAT is correctly due on the whole charge, including the wage element. But in this model you are not the employer, which changes a great deal around control, employment rights and responsibility. It is a different arrangement with different consequences, not a rewards trick.
- The scheme that fails. You remain the legal employer, but the provider charges VAT across your gross salaries anyway, purely to inflate the card spend that earns the points. That VAT has been charged in error.
The rewards pitch tries to borrow the tax treatment of the second model while leaving you in the first. You cannot have both.
Why you cannot simply reclaim the VAT
This is the point that turns an odd invoice into a real liability. HMRC’s position is that VAT charged incorrectly is not input tax, so you cannot recover it, even if you paid it in good faith. The correct course is to go back to the supplier for a credit note and a refund, not to claim the amount on your VAT return.
The reward maths in these schemes quietly assumes you reclaim that 20%. If you cannot reclaim it, the whole case for the scheme collapses, and you are left carrying the VAT.
The four-year trap
On a routine VAT inspection, HMRC can look back up to four years, and up to twenty years where it considers the behaviour deliberate. If it finds input tax claimed on wrongly charged VAT, it will disallow the deductions and demand repayment, with interest at the prevailing rate on top.
Then come the penalties. HMRC can charge up to 30% of the tax for a careless error, up to 70% for a deliberate one, and up to 100% where the error is deliberate and concealed. A scheme designed specifically to route salaries through a card loop for points is difficult to present to an inspector as an innocent slip.
The real price of the points
The only reason to force your whole salary bill through a VAT-bearing invoice is to inflate the transaction volume that triggers the rewards. That is the loophole, and it is the entire point of the structure.
So the trade you are being offered is this. Earn airline points now, and carry a potential 20% VAT liability, plus interest and penalties, for up to four years. On a large wage bill, that exposure dwarfs the value of the miles. In plain terms, you would be borrowing against a future tax bill to buy flights.
What good looks like
Keep it simple. You employ your team. Your payroll provider runs the payroll and charges VAT on its fee only. Your wages carry no VAT. If you want to earn card rewards, do it on spend that is genuinely VATable, such as the processing fee or ordinary business costs, not on salaries.
If a provider tells you that you can reclaim VAT across your entire salary bill, treat it as a red flag. Get the arrangement checked before you sign anything, because the person left holding the liability is you, not the platform.
Where we stand
We are an HMRC authorised tax advisor, and we would rather lose a deal than put a client in front of a four-year assessment. That is why we walked away from a scheme built on this exact structure.
If a borderless or rewards-led payroll pitch has landed on your desk and the numbers look too good, send it to us. We will tell you plainly whether it stands up.