Does VAT apply to vouchers and giftcards?

It’s the time of year when people are generous and gifting is very much the order of the day. But, when you can’t find the perfect gift for someone, then one alternative is to send them a gift card or voucher that allows them to choose something for themselves. Or if the gift you want to give is an experience rather than a physical item, you might have to give a voucher or gift card that grants them the right to enjoy an experience somewhere later in time.

The holidays are also a time when retailers run various promotions to try and entice us to shop with them. For example, there are vouchers issued where if you spend a certain value in December, you get a voucher giving you money off if you spend again in January.

But how does VAT apply to these? Well.. as often in tax, the answer is: “it depends…” This guide aims to walk you through VAT on vouchers and gift cards.

Does the voucher work a bit like cash?

The main distinction to identify is if the voucher gives the recipient a degree of choice over what they use it for. If the gift card is for somewhere like a supermarket chain, or large online retail emporium, then there’s no real restriction on what the gift card is ultimately used for.

If it’s not in stock, you can’t have it… but apart from that the gift card could buy anything from children’s clothing to smoking cessation patches to Sancerre to sports equipment… just so long as the retailer has it (and some vouchers even give some choice over where you shop).

The VAT angle here is that it’s impossible to predict what the ‘gift’ will ultimately be. In turn, that means it’s impossible to know for certain what VAT will be due on the sale.

When the person buys the voucher, there’s no VAT charged and no VAT to reclaim. When the voucher is redeemed/spent, then the seller accounts for VAT at that point.

There’s a slightly quirky technical point here because gift cards aren’t always sold for their full-face value. Sometimes the gift card gets sold to a distributor at reduced cost and there are situations where an end customer might get a discount for buying in bulk. For example, a large employer giving all staff a voucher of some kind, as part of a year-end ‘thank you’. In these cases, the retailer is supposed to account for VAT on the actual value that was paid for the gift card. However, in practice the tracking of individual gift cards through various distribution channels can be impractical. Therefore, the end retailer will often just account for VAT on the face-value of the gift card which results in a small ‘extra gift’ to HM Treasury.

Most of the time, the ‘present’ being bought with the voucher won’t be getting used in the course of running a business. In turn, this means the VAT charged by the seller can’t be recovered by the recipient of the voucher.

Single Purpose Voucher

The other basic type of gift card is for a specific purpose. Examples include vouchers that ‘give’ someone a round of golf, afternoon tea in a nice hotel, a spa experience, or a helicopter ride…

When it comes to VAT, the tax treatment of the goods or services being ‘promised’ by the voucher will be known at the point the voucher is sold. Therefore, the VAT should be accounted for at the point the voucher is sold, based on the actual sum received for the voucher, even if it has a higher value printed on it. For example, if a spa treatment normally costs £100 retail, but a health club sells a gift voucher at £80, VAT only applies to the £80 which will be received.

If you’re a retail or hospitality business issuing vouchers like this, then any VAT due should be included on your next VAT Return and paid across to HMRC at that time. Essentially, the voucher is simply ‘prepaying’ the cost of the experience, and normal VAT rules apply, meaning that if cash moves, it triggers a VAT liability.

However, when the customer has their gourmet meal, gets their hair styled (or whatever the experience is…), there’s no further VAT due at that point. Although if the customer buys an upsell on the day, there will probably be more VAT due. VAT is wonderful in that way.

Reclaiming the VAT on giftcards/vouchers?

Some employers buy this kind of voucher for their staff or for other business contacts at Christmas time and might wonder if they can recover any of the VAT incurred here.

Vouchers as a ‘thank you’ to clients and suppliers are considered an “entertaining” expense, therefore recovering the VAT is blocked. Entertaining clients is not considered a ‘necessary’ business expense therefore VAT reclaims are not generally permitted (we talk about this in a separate article).

If you give the vouchers to staff, then it gets a little more complicated. For lower value gifts that meet the criteria for the £50 trivial benefit for income tax, an employer is generally ‘safe’ to recover any VAT incurred. If the cost per employee goes above £50 then it’s probably worth either disclaiming the VAT or talking to a specialist, because while VAT could technically be reclaimed, giving the voucher to an employee could trigger a VAT charge – often it’s easiest to avoid claiming in the first place.

The gift of the summary

The purpose of giving a gift card or voucher isn’t really to save tax, so VAT planning won’t be high on everyone’s list of priorities here.

If you’re in a business that issues vouchers, make sure you understand which type you’re selling and when your VAT payment should be made to HMRC.

And, if you’re lucky enough to get a gift voucher this Christmas… do enjoy whatever it brings and leave the VAT questions for us. 

Drop our Associate Director, Iain Harris, a message if you have any questions or concerns.

Please note the above commentary is a general guide only, and should not form the basis of specific decision-making or be considered bespoke advice. Always speak to a professional if you need specific guidance.