You might need a coffee to keep you awake for this one.
Sarcasm aside, understanding VAT in relation to gift cards is actually quite important. From a customer’s perspective, none of this really matters (unless they are interested in when they get their VAT receipt).
But when it comes to accounting for your gift card sales, you might want to pay attention.
A short history of VAT on Gift Cards
On 1st January 2019, the UK started to implement the EU Directive on the treatment of VAT of vouchers. Before this date, the ‘old rules’ still apply.
So two rules; one rule for vouchers sold after 1st Jan 2019, and another rule for those sold before 1st Jan 2019.
So what changed? Well, hold on, before we get to that, we first need to point out that the laws regarding this subject make a distinction between a Single Purpose Voucher (SPV) and a Multi Purpose Voucher (MPV). And it’s the definition of those two things that has changed with the new directive.
SPVs and MPVs
Definition before January 1st 2019
Before January 1st 2019, the definition of an SPV is that the voucher can be used to purchase goods or services of a single type (and at a VAT rate that is known at the time the voucher is purchased).
Definition after January 1st 2019
After January 1st 2019, the definition of an SPV changed such that a voucher can be used to purchase goods or services of multiple types (as long as the VAT rate on those things are all at the same rate).
Say that again… slowly.
Let’s try it with some examples…
* Books are zero-rated for VAT.
** Cold takeaway food is zero-rated for VAT.
Simply put, if you are selling gift vouchers and they can be claimed for things from your shop or venue that are at different VAT rates, they are MPVs. If not, they are SPVs.
Why does all this matter?
OK, good question. Here are the key differences:
So in effect, after 1st January 2019 since the definition for SPVs became broader, the liability for VAT is now due much earlier.
What happens when the customer partially pays with a voucher?
So what happens when a customer uses their gift voucher against their total bill?
Here’s an example which will answer that question:
An SPV is issued by your restaurant and purchased for £30 by a customer. You account for VAT on the £30 when it is purchased (so £30 inc. VAT).
The customer goes into your restaurant and spends £50 in total, using their £30 voucher plus an extra £20 using their credit/debit card (or in cash). The additional £20 that the customer paid is taxed at the time they settle their bill. But the £30 has already been taken into consideration for VAT, so don’t account for it again.
However, in the example above, if the voucher was an MPV, the £30 voucher sold would be sold excluding VAT. So when it is redeemed, the full £50 bill is considered for VAT.
All clear? That’s the end of it, right? Not quite…
Giving away free gift vouchers
So what happens when you issue a card free of charge to a customer? The answer is… well, it depends.
Here are three common examples:
You give away a free of charge (FOC) gift voucher for promotional reasons (e.g. £20 voucher off a customer’s next visit)
You give a free gift voucher to someone as a reward (a member of staff, for example)
You buy some gift vouchers from somewhere else and give them away to your customers or staff.
In examples 2 and 3, everything above is still true. They are gift vouchers and come under the same VAT rules.
However, in the first example, the voucher has been issued at 100% discount so is not liable to the VAT rules.
What about Brexit?
Don’t get all political on us!
Oh, do you mean, do the rules apply if the UK leaves the EU?
Well, thankfully, we can end this article with a simple answer to that one: yes, they will apply regardless of what happens with Brexit.
Oh, and what about VAT invoices?
Sometimes a customer might ask for a VAT invoice for the gift card they purchased from you. Please note that VAT isn't payable until redemption, so Toggle doesn't have VAT invoices.
Toggle do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.