As of January 1, 2019, the Government implemented an EU Directive for VAT on vouchers, which simplifies the rules for how tax is treated in regards to vouchers, particularly where they can be used in the UK or across the EU. The measure shall prevent double taxation or non-taxation of goods/services related to vouchers and will likely affect retailers and distributors engaged in the purchase, sale, and/or redemption of gift vouchers.
How VAT on Vouchers works under the new law
HMRC has confirmed that the latest EU rules around vouchers have been implemented despite the UK’s exit from the EU. The new rules have been effective since the 1st of January, 2019 and the recently closed consultation has to do only with how the rules are going to be written into UK law.
In the new directive, a voucher is defined as an instrument that businesses must accept as either full or part payment for goods/services rendered. Vouchers may be physical or electronic, including book tokens and gift cards, and are redeemable against goods or services.
UK law already has a description of SPV (single-purpose vouchers) and MPV (multi-purpose vouchers) written into it; the new rules widen the scope of SPV only.
According to the old rules, an SPV was defined as a voucher redeemable against goods/services of one type, and therefore, subject to single VAT rate, with all the other vouchers being considered MPVs. When an SPV is issued, VAT is accounted for, but with MPVs, the same is applicable when redeemed; the latter is liable to VAT upon redemption as it is only at that point that VAT rate can be identified.
Now, under the new rules, an SPV is considered a voucher only if the following are known at the time of issue:
The place of supply of goods & services to which the voucher relates, as well as the VAT due on those goods/services.
This is an extension of the current definition. And now, the removal of ‘one type’ essentially refers to the fact that many vouchers which were potentially considered MPVs will now effectively be SPVs. To further demonstrate the new definition, HMRC has given the example of a UK retailer who issues a voucher to be exchanged for DVDs, CDs, computer videogames and accessories;
Under the previous VAT law, this voucher could be considered an SPV because the above do not belong to the same category of goods. But, under the present law, this voucher will be considered an SPV because the underlying condition has been met: the place of supply of the goods is known and all goods are rated as ‘standard’.
Keeping in view the above, MPVs are regarded as any other voucher which is not an SPV – meaning that any voucher redeemable against goods/services with different VAT rates or, for example, where the place of supply may be in different countries, would be categorised as an MPV.
If you’re a business dealing with vouchers, it would pay to review your vouchers in order to determine whether they will be affected by the now wider scope or definition of an SPV – because it will likely impact the way VAT comes into the picture.
At the moment, there’s no provision in EU law which distinguishes between retailer vouchers (that is, those issued and redeemed by the same party) and credit vouchers (which are issued and redeemed by different parties) – which means the differentiation will most probably be removed from the law altogether in order to make VAT accounting procedures more straightforward.
How it will affect chain transactions
The new rules will see some changes across intermediaries and agents. A distributor purchasing and selling SPVs, for instance, will be regarded as making a supply of the goods/services in question. Resultantly, VAT will come into play through the chain, that is, if the goods/services in question are taxable.
With that said, if the intermediary agent is acting on someone else’s behalf, they are not really making a supply of the goods/services in question and their supply, therefore, will only be for their own intermediary services.
As far as MPVs go, only the provision of goods and services in exchange for the voucher are affected by VAT. Therefore, the sale of MPVs by intermediaries are not subject to VAT and they cannot reclaim any VAT on costs tied in with the sale of the vouchers.
If the intermediary is acting on someone else’s behalf, they are not transferring the voucher and, therefore, their supply will be regarded as intermediary services which are subject to VAT. Therefore, VAT recovery on related costs is allowed, with the normal rules in view.
Retail schemes and ‘part payment or part use’
A few key things to remember in regards to the above two:
Since SPVs are taxed at the point of purchase (and not the point of redemption), the supply of goods/services in exchange for the voucher should not be included in the daily gross takings.
MPVs, on the other hand, should be included when redeemed but not included in daily gross takings when they are issued.
Part payment or part use?
If the price of goods/services are higher than the voucher’s value, VAT is due on the total amount of the voucher, along with the additional payment.
If an SPV is partially used, any remaining value on the voucher includes VAT. If the voucher is not redeemed at all, then there will be no reversal of VAT.
If an MPV is partially used, the taxable amount applies only to the proportion of the payment which the voucher’s buyer makes.
Since the vast majority of goods and services here incur the same flat rate of 20%, most gift vouchers are regarded as SPVs and need to have their VAT paid at the point of purchase.
If you’re a VAT-registered business, then you need to be aware of how SPVs and MPVs are treated under the new rules. Get in touch with our tax accountants to learn more.