VAT and customer incentive schemes

In-house or third party schemes

There are numerous types of reward scheme which you can operate yourself (in-house) or through a third party such as Nectar. In this article we are only looking at in-house schemes where you have a VAT registration.

Initial fee

If you charge customers a joining fee for your loyalty scheme it counts as a supply of a service and therefore you must to add VAT at the standard rate to it. For example, you offer a discount on selected goods for customers who join your discount scheme and you charge £24 for membership. This is £20 plus VAT at 20%, i.e. £4. Naturally, if you don’t make a charge for membership you don’t need to worry about VAT.

Discounts

If your scheme involves discounts the VAT position is simple. VAT is only payable on the discounted price. You must make the price on which VAT is charged clear on your invoices/receipts. How you do this is up to you as long as the actual price charged, on which VAT is payable, is clearly shown.

Face value vouchers (FVVs)

If your scheme involves FVVs, e.g. if a customer spends £100 they receive a voucher for £10 which they can redeem against a future purchase, for VAT purposes the £10 is treated the same way as a discount when the voucher is redeemed. This means you only charge VAT on the net amount paid on the future purchase. Again, this must be clearly shown on your invoice or receipt.

Points schemes

If your scheme involves awarding points each time a customer makes a purchase, which they use against future purchases, you don’t need to worry about VAT until they use the points. The three most common methods used for redeeming loyalty awards are:

1. The customer gets a discount on the normal purchase price of goods or services.
2. You issue them with a FVV when they reach a certain number of points, which they can use to pay wholly or partly for goods or services.
3. You give your customers free goods or services when they have earned enough points.

Free goods or services for points

For the third type, free goods or services, the VAT rules for business gifts apply:

• if you give your customer free goods you don’t have to account for VAT unless the cost to you of providing them exceeds £50 within a twelve-month period
• if you supply free services you don’t have to account for VAT at all except where you paid a third party for the service. In that case you must account for VAT on the gift equal to what the service cost you. You can reclaim the VAT you paid for the purchase of the service but not if you pay someone else to supply the service.

Tip. You can recover the VAT you pay on providing goods as a free gift.