When do you Pay VAT on Gift Cards?

Many businesses rely heavily on gift card sales, especially during the festive period.

The law surrounding VAT on gift cards changed in January 2019 to align with the EU legislation and it is important that businesses understand how this may impact them. The EU Vouchers Directive aims to harmonise VAT treatment of vouchers across EU Member States.

Understanding the VAT Treatment for gift cards:

To explain how the legislation works, we have used the example of one of our clients who owns a bookshop in Norfolk and who wanted to start selling gift cards. 

They asked: “Should VAT be declared at the point of sale of gift cards, or once they have been redeemed for goods?”

On the face of it, this seems like an easy question to answer because books are zero-rated, meaning VAT wouldn’t need to be declared at any point. However, it isn’t quite as simple as that, because it isn’t just books that are sold in the bookshop. There is also a vast array of book-related items on offer such as bookmarks and bookends, as well as merchandise such as mugs and bags.

This is where it gets a little more complicated. Many of the non-book items aren’t zero-rated, so VAT must be paid on them. The question remains then, does our client need to declare VAT on the sale of gift cards or at the point where the goods are redeemed? This includes different types of vouchers such as credit vouchers and discount vouchers, which have their own specific VAT treatments.

In this instance, the answer is that VAT only needs to be declared on VAT chargeable products at the point they are redeemed with the gift card. 

However, if another business  approached us about gift cards, we might give them  a very different answer because the rules surrounding VAT on gift cards vary depending on your business and the products you sell. These vouchers can exist in either physical or electronic form. adding another layer of complexity to their VAT treatment.

Additionally, retailer vouchers have specific VAT implications regarding when tax is paid—at the issuance, transfer, or redemption of these vouchers.

The classification of such a voucher determines the VAT obligations and redemption conditions, emphasising the need for clear definitions.

For single purpose vouchers, the VAT rate is predetermined at the time of purchase, while multi purpose vouchers may involve varying VAT rates depending on the products purchased.

Understanding VAT receipts is crucial for businesses and customers involved in sales transactions, ensuring proper VAT accounting.

Finally, comprehending VAT regulations is essential for businesses to navigate the complexities of VAT treatment for gift cards effectively.

What are single purpose vouchers (SPVs)?

A single purpose gift voucher is one that allows the holder to receive goods or services of one type which are subject to just one rate of VAT. With these types of gift cards, the VAT rate is predetermined and VAT is paid at the point of sale, not when it is redeemed.

What are multi purpose vouchers (MPVs)?

Multi purpose vouchers are exactly the opposite. These are used when your business is selling a variety of products that don’t all fall under the same rate of VAT. When using multi purpose vouchers, VAT rates impact the issuance and redemption of these vouchers, with VAT being paid once the goods are redeemed.

If, for example, you own a company that delivers one type of service, everything you do will be subject to the same rate of VAT. You would, therefore, be issuing single purpose gift cards, meaning VAT would be declared at the point of sale.

If, on the other hand, you own a general goods shop selling an array of different products from vegetables to toiletries, you would be issuing multipurpose gift cards and VAT would be paid at the point the gift card is redeemed. The appropriate rate of VAT would be charged on a product-by-product basis. 

It is worth considering that different rules apply when gift cards are sold at discounted rates. Matters are complicated further when one business sells gift cards that can be redeemed at other establishments. In these cases, more specific advice is necessary and we would recommend getting in touch to discuss your specific requirements with our team.

If your business is looking to start selling gift vouchers, or you would like further clarity around VAT rules for your business, our team is here to help.