PROMOTIONS - 28.02.2024

How to account for VAT on customer vouchers?

What is a voucher?

Many vouchers issued by your business will be electronic rather than in a paper format. This is fine - the key point is that the voucher will have a monetary value that can be used by the recipient to buy goods or services in the future. Any terms about the redemption must be clearly stated on the voucher, e.g. it can only be used from Monday to Friday between 9am and 2pm. These vouchers are commonly known as “face value” vouchers.

Trap. A discount voucher, e.g. 10% off your next order exceeding £50, is not a face value voucher because there is no fixed monetary amount linked to the voucher. For example, a 10% discount voucher will be worth £40 to someone who spends £400 but only £5 to someone who spends £50.

Single or multi-purpose voucher?

To account for VAT correctly, you must decide whether you are issuing single or multi-purpose vouchers to your customers:

• if the vouchers can only be redeemed against goods or services subject to one rate of VAT, they are classed as a single purpose voucher
• if they can be redeemed against goods or services subject to different rates of VAT, they are multi-purpose vouchers.

The VAT treatment is different in each case.

Example. Molly owns a stationery business and book shop. She sells face value vouchers in batches of £20 to her customers, which can be redeemed against any goods she sells. As she sells both standard-rated stationery and zero-rated books, she is issuing multi-purpose vouchers.

Tip. You will usually issue vouchers in return for a monetary payment from your customers but there is no difference if they make a non-monetary payment, e.g. you give them a £50 voucher and they will do two hours of cleaning work for your business.

Accounting for VAT

If you issue single purpose vouchers, you must account for VAT when the buyer pays for the voucher. The receipt of money following the transfer of the voucher creates a tax point and an output tax liability, assuming that the single rate of VAT is 5% or 20% rather than zero-rated. However, no tax point is created with a multi-purpose voucher until your customer redeems it for goods or services. This is logical because you will not know until the voucher is redeemed if the supply has been for, say, standard or zero-rated goods.

Tip. You could be proactive and only issue multi-purpose vouchers so that you will delay accounting for VAT. However, you must obviously sell goods or services subject to at least two different rates of VAT.

What if vouchers are never redeemed?

If a multi-purpose voucher is never redeemed by your customer, you will never account for output tax, despite the fact that you received money when it was originally purchased. This is because there will only be a tax point created, or time of supply, if the voucher is redeemed for either goods or services.

Tip. This is another incentive for issuing multi-purpose vouchers. If all the goods you sell are standard-rated, could you perhaps introduce a new line of stock that is either zero-rated or subject to 5% VAT?