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Is there concern about whether merchant tokens or crypto-based loyalty points will trigger unexpected tax bills? Many businesses and individuals issue or receive tokenised rewards without clear accounting or VAT treatment, creating exposure to HMRC enquiries.
This guide provides actionable, HMRC-aligned clarity on the Tax Treatment of Merchant Tokens & Loyalty Programmes in the UK. It gives practical valuation methods, VAT checklists, accounting entries, payroll considerations and record-keeping templates to close common compliance gaps.
Key takeaways: what to know in one minute
- Classification depends on the arrangement: merchant tokens can be taxed as income (on receipt or redemption) or as capital gains (on disposal) depending on how they are issued and used. Contract terms and commercial substance matter.
- HMRC treats most loyalty points as consideration for supplies when they alter the VAT point; vouchers are assessed using the single- vs multi-purpose rules in VAT Notice 700/7. HMRC VAT Notice 700/7
- VAT may arise at issuance, sale or redemption depending on whether tokens are single-purpose or multi-purpose vouchers; tokenised cashback often creates VATable supplies between merchant, platform and customer.
- Valuation must be practical and defensible: use market price, fair value of underlying goods/services, or a commercial exchange rate when tokens trade externally. Document method and sources.
- Payroll and benefits risk is real: employee rewards in tokens can trigger PAYE/NICs when they are taxable benefits or salary substitutes.
Are merchant tokens taxed as income or capital gains?
Merchant tokens require a fact-sensitive analysis to determine whether receipts or disposals produce income, trading receipts, or capital gains. The following checklist clarifies the primary indicators HMRC will consider.
Indicators that tokens are taxable as income
- Tokens are issued as payment for goods or services (discount tokens redeemed at sale) — treated as part of sales revenue.
- Tokens are given to customers as rewards for purchases where the business treats them as promotional expense but the recipient can exchange them for value — HMRC may treat the recipient's acquisition as taxable income where it has monetary value and is not a mere voucher.
- Tokens are regularly bought and sold by an entity as part of a business model (e.g., operating a marketplace) — receipts counted within trading income.
Indicators that tokens are taxable as capital gains
- Tokens are acquired as assets with expectation of capital appreciation and are held by individuals or entities not trading in tokens — disposal results in capital gains tax (CGT) for individuals or chargeable gains for companies.
- Tokens are issued in limited supply without an underlying obligation to supply goods/services — the token behaves as an investment.
Practical examples
- A frequent shopper receives 100 merchant tokens convertible into £1 per token at participating outlets. If the token is redeemable against goods, the recipient has received a benefit akin to a voucher: the issuer records an expense; the recipient typically has no taxable income unless the reward is conditional on employment or performance.
- A developer issues a token on a blockchain, which the company purchases and later sells at a profit — the company will treat profits as trading income if the activity is within ordinary business, or as a chargeable gain if held as an investment asset.
How HMRC treats loyalty programme points and tokens
HMRC separates the legal character of the token from its economic substance. Official guidance on loyalty schemes focuses on vouchers and promotions, but HMRC has indicated that cryptoassets receive the same tax principles where applicable: substance over form.
HMRC references and norms
- VAT guidance for promotions and vouchers: VAT Notice 700/7 explains single- and multi-purpose voucher rules.
- Cryptoasset tax guidance: HMRC: tax on cryptoassets sets out income, trading and capital gains principles applicable to tokenised schemes.
How to classify loyalty tokens for tax purposes
- Determine the obligation chain: who is ultimately supplying the goods/services for token redemptions? If the issuer remains liable, VAT and income treatment may fall on the issuer.
- Establish whether the token is a voucher under VAT law: if the token unambiguously entitles the holder to a specific supply where VAT rate is known (single-purpose voucher), VAT is due when the voucher is issued. If not (multi-purpose), VAT arises when redeemed.
- For income tax/CGT, determine whether tokens are received by the holder as part of employment, as business income, or as a capital investment.
VAT responsibilities for merchant token and reward transactions
VAT issues are often the first HMRC focus because VAT rules on vouchers are specific and can trigger VAT at issuance. The VAT position depends on whether a token qualifies as a single-purpose voucher (SPV) or multi-purpose voucher (MPV).
Single-purpose voucher (SPV)
- An SPV is a voucher that, at issuance, gives the holder the right to a supply where the VAT liability and rate are known.
- VAT point is at issuance: issuer charges VAT immediately on the face value.
Multi-purpose voucher (MPV)
- An MPV is a voucher where the VAT rate or the identity of the supplier are not known at issuance.
- VAT point is at redemption: VAT accounted by the supplier who provides the goods/services when the voucher is exchanged.
Practical VAT check for merchant tokens
- If a token explicitly redeems only for an identifiable product supplied by the issuer and the VAT rate is known and constant, treat as SPV.
- If the token can be exchanged for multiple goods/services with varying VAT treatments or may be traded, treat as MPV.
- If a third-party platform sells tokens on behalf of merchants, agreements must specify who accounts for VAT on issuance and who is treated as supplier at redemption.
Table: VAT outcomes for common token flows
| Token flow |
Likely VAT treatment |
Practical action |
| Issuer token redeemable only for a known product supplied by issuer |
Treat as SPV; VAT due at issuance |
Issue VAT invoice or equivalent; account for VAT on receipt |
| Token redeemable across multiple merchants with variable VAT rates |
Treat as MPV; VAT at redemption by supplier |
Clarify supplier responsibilities in contracts; track redemptions by VAT rate |
| Crypto cashback credited to wallet and tradable |
Likely MPV or supply between parties; VAT may apply on service fees or redemption |
Define whether cashback is a discount, reward or taxable supply; document fee flows |
VAT invoicing and accounting responsibilities
- Ensure contracts specify who issues invoices and which party reports VAT when tokens are sold by a platform or redeemed at a third party. A failure to designate the supplier can create multiple VAT exposures.
- Retain transactional data linking token issuance, transfers and redemption to VAT accounting entries.
Valuing merchant tokens for tax: practical methods
Valuation determines the taxable base for income tax, VAT and CGT in many token scenarios. The chosen method must be commercially consistent, documented, and defensible to HMRC.
Common valuation methods
- Market price method: use prevailing exchange price where tokens trade on liquid markets. Suitable when tokens have a reliable market.
- Underlying value method: value tokens based on the fair value of the goods/services obtainable on redemption (e.g., token redeemable for £1 of coffee → valuation = £1).
- Cost-based or discounted cash flow: for bespoke tokens representing future service entitlements, use projected cost or discounted redemption value.
Practical rules and examples
- Where tokens are sold for sterling, use the contracted sterling amount as the taxable value for VAT and income calculations.
- For token trades on crypto exchanges, use the spot price at the relevant tax point (receipt, disposal, redemption). Document the exchange, timestamp and rate used.
Example: A business issues 10,000 tokens at £0.10 each. If tokens are SPVs redeemable for a fixed product, VAT is accounted on the £1,000 receipt. If tokens are MPVs sold on a platform and later redeemed for goods with higher VAT rates, VAT is reported at redemption by the supplier.
Record-keeping and accounting for crypto loyalty programmes
HMRC expects robust records. For token programmes the key records align with standard VAT and tax obligations but require additional token-specific fields.
Minimum records to keep
- Issuance ledger: token ID, quantity, recipient, date, purpose (sale, reward, cashback).
- Redemption ledger: token ID, date, merchant, goods/services provided, VAT rate applied, sterling value at redemption.
- Exchange and market data: for tokens traded externally, archive exchange names, timestamps and price data used for valuation.
- Contracts and T&Cs: agreements with merchants, platform providers and customers defining supplier liability and VAT responsibility.
Accounting entries: simple examples
1) Issuance of tokens sold for cash (company issues 1,000 tokens at £0.50 each):
- Dr Bank £500
- Cr Deferred income (liability) £500 (unless SPV where VAT may be due at issuance)
2) Redemption of tokens for goods where issuer supplies the goods:
- Dr Deferred income £500
- Cr Revenue £416.67
- Cr Output VAT £83.33 (assuming 20% VAT)
3) Employee reward of tokens (taxable benefit):
- Recognise taxable benefit at fair market value on the date of receipt; process through PAYE if related to employment.
Employee rewards, PAYE and taxable benefits in tokens
Tokens given to employees or directors are frequently caught by PAYE and National Insurance rules where they are classed as earnings or benefits.
When tokens trigger PAYE/NICs
- Tokens awarded in return for employment services (performance bonuses, sign-up incentives) normally count as earnings and should be subject to PAYE and employee/employer NICs at the point the employee obtains the benefit.
- If tokens are convertible into cash or transferable, HMRC treats the value at the time the employee is entitled to the token as the taxable amount.
Practical payroll steps
- Determine the taxable value: market price or redemption value at date of receipt.
- Operate PAYE: report via payroll and include on P11D where necessary for benefits in kind.
- Consider salary sacrifice: if tokens are part of a salary exchange, ensure the arrangement meets rules and that both employer and employee tax consequences are addressed.
Record-keeping checklist and policy template (operational compliance)
- Maintain separate token ledgers, reconciled to accounting software monthly.
- Contractual allocation: supplier, platform, merchant responsibilities set out in writing.
- VAT mapping: tag each token to VAT treatment at issuance and reconciliation at redemption.
- Payroll linkage: flag token receipts to payroll for staff and directors.
- Audit trail: preserve blockchain transaction hashes, timestamps and off-chain invoices.
Token lifecycle: from issuance to tax reporting
1️⃣Issue → record recipient, purpose, sterling consideration (if any)
2️⃣Trade/Transfer → log on-chain movement, capture market price if swapped
3️⃣Redeem → identify supplier, VAT rate, and sterling value
4️⃣Report → account revenue, VAT, PAYE or CGT as appropriate
Advantages, risks and common errors
✅ Benefits / when to apply tokenised loyalty programmes
- Improved customer engagement and data capture when tokens link to customer accounts.
- Precise promotion targeting and analytics that can justify tax treatment as marketing spend.
- Potential cash flow benefits when tokens are sold in advance (deferred income).
⚠️ Risks and errors to avoid
- Misclassifying an MPV as an SPV and incorrectly accounting for VAT at issuance.
- Failing to document valuation methodology for token receipts — opens exposure to HMRC adjustments.
- Neglecting payroll implications for employee token rewards.
- Inadequate contracts with third-party platforms leading to unclear VAT supplier status.
Frequently asked questions
Are merchant tokens taxed as income when received by a customer?
If the token has a clear monetary value and is provided as consideration for services, the issuer’s treatment may produce taxable income; recipients are generally not taxed unless the token is linked to employment or is convertible to cash.
When does HMRC expect VAT to be accounted for on tokens?
VAT is due at issuance for single-purpose vouchers; for multi-purpose vouchers VAT is due at redemption by the supplier. Contracts and practical redemptions determine the outcome.
How should tokens traded on crypto exchanges be valued for tax?
Use the spot market price at the relevant tax point (receipt or disposal). Keep exchange records, timestamps and conversion rates for HMRC scrutiny.
Do employee tokens always trigger PAYE?
Not always; tokens tied to employment services or performance are taxable as earnings and should be processed under PAYE. Non-employment gifts with low value may fall outside PAYE but require careful assessment.
Can a merchant avoid VAT by structuring tokens as discounts?
Substance determines VAT. If the token effectively substitutes consideration for a supply, VAT rules apply. Artificial structuring without commercial substance risks challenge.
Is there guidance that specifically mentions crypto loyalty tokens?
HMRC has not published token-specific loyalty guidance that replaces voucher rules; the general VAT Notice on promotions and HMRC cryptoasset tax guidance are the primary references. See HMRC: tax on cryptoassets.
What records should be kept to defend a valuation to HMRC?
Transaction timestamps, blockchain transaction IDs, exchange screenshots or API exports, contractual documentation, and reconciled accounting entries.
Conclusion
Merchant tokens and crypto loyalty programmes sit at the intersection of VAT, corporation tax, income tax and payroll rules. Correct classification, documented valuation and clear contractual allocation of supplier responsibilities are essential to avoid costly HMRC adjustments.
Your next step:
- Review token terms and identify if tokens are single-purpose or multi-purpose; document the rationale.
- Implement token ledgers that capture issuance, transfers and redemption with timestamps and sterling values.
- Update payroll processes to flag employee token receipts and consult a specialist where large or frequent rewards occur.