Category Archives: VAT commentary

VAT – Trading in Bitcoin ruled exempt by ECJ

By   22 October 2015
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VAT – Trading in Bitcoin ruled exempt by ECJ

Further to my article of 13 March 2014 here

The European Court of Justice (ECJ), the highest court of appeal for EC matters, has ruled that trading in digital, such as bitcoin, is exempt. this is on the basis that they are a method of payment with no intrinsic value, like goods or commodities.  They are therefore covered by the exemption relating to “currency, bank notes and coins used as legal tender” – (Article 135 (1) of the VAT directive). 

This confirms that the UK authority’s approach is correct and that the VAT treatment applied in Germany, Poland and Sweden where those authorities treated the relevant transactions as subject to VAT, is erroneous.

This is good news for the UK as it is a big (if not the biggest) player in the bitcoin sector.

VAT e-audits: A warning

By   15 October 2015
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The increase in the sophistication and use of data analysis software has enabled HMRC and tax authorities worldwide to increase the number of indirect tax VAT e-audits.

This has led to an increase in, and higher quantum of; assessments, penalties and interest.  The use of more automated resources means that HMRC is capable of auditing a greater amount of information from a greater number of businesses.

Even greater care must be taken now with recording and reporting transactions and the application of calculations such as partial exemption.  The need for accurate and timely records has never been more important. It’s crucial that the basics of compliance are taken care of, as well as seeking advice and reviews on specific issues.

These issues are summarised here

Please contact us if you feel that your VAT systems need to be checked, or if you have any doubts about the accuracy of your business’ indirect tax reporting.

We offer a full range of reviews, from a straightforward healthcheck to a full report on a business.

As the severe motto has it:  Comply or die!

VAT and sales promotion vouchers – Latest

By   5 October 2015
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HMRC has appealed to the Upper Tribunal against the First-Tier Tribunal’s decision in the Associated Newspapers matter. The FTT decided that Associated Newspapers could recover input tax incurred on vouchers given away in its sales promotion schemes.

A previous decision by the FTT that no output tax is due on the vouchers when given away as part of a sales promotion is subject to an appeal and both cases will be heard together this week.

This is likely to have a significant impact on the VAT treatment of vouchers and sales promotion schemes and will be watched with interest by many businesses. The outcome may also affect staff incentive schemes where vouchers are provided.

The interaction between vouchers and VAT has had a turbulent past and the matter is complex.  I hope that we obtain some clarity from the courts before too long.

VAT Land and Property – Why Opt To Tax?

By   5 October 2015
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Opting to tax provides a unique situation in the VAT world. It is the sole example of where a supplier can choose to add VAT to a supply….. or not.

VAT free supplies

The sale or letting of a property is, in most cases, exempt by default. However it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate.  (It is not possible to OTT a residential property).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20 year period (although there are circumstances where it may be revisited within six months of it being taken).  There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases H M Revenue & Customs’ (HMRC) permission must usually be obtained before the option can be made.

Two part process

The OTT is a two part process.

  • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
  • The second part is to formally notify HMRC (after obtaining permission if necessary).  The form on which this is done is a VAT1614A. Here

There can be problems in cases where the OTT is taken, but not formally notified.

Disadvantages

The benefit of taking the OTT is the ability to reclaim input tax which would otherwise fall to be irrecoverable. However, one disadvantage is that opting the sale or rent of a property may reduce its marketability as it is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property.

Another is that the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be funded up front.

Also, an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.
Transfer Of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and also in cases of a Transfer of A business as a Going Concern (TOGC). This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met.

Property transactions are high value and often complex. The cost of getting VAT wrong, or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues.  For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT Payment Problems – Q & As

By   29 September 2015
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If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away.  Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is the Default Surcharge?

A: Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a Default Surcharge be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

Q: How much is it?

A: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2 per cent for the first default following the Surcharge Liability Notice, and rises to 5 per cent, 10 per cent and 15 per cent for subsequent defaults within the surcharge period.  A surcharge assessment is not issued at the 2 per cent and 5 per cent rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10 per cent and 15 per cent the surcharge will be the greater of the calculated amount or £30.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns.

Both types are included in the traders’ debt and are collected in the normal way if they are not paid promptly.

Help 

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.
Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.
Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.
Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

Please contact us if VAT payments are proving a problem for your business.  Negotiation with HMRC is possible.

Charities and VAT

By   7 September 2015
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Overview

Surely charities don’t have to pay taxes?

This is a common myth, and while charities do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • Ensure any applicable reliefs are taken advantage of.
  • If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
  • Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
  • Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
  • Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
  • Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is a two stage process. The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration.  If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals.  An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax.  For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes.  However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred.  A business in this position is called partly exempt.  Generally, any input tax which directly relates to exempt supplies is irrecoverable.  In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method.  The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business.  The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered.  Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart 

De Minimis

There is however relief available for a business in the form of de minimis limits.  Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way.  The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.  As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full.  This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year.  The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

Very basic VAT Q & As for a fledgling business

By   25 August 2015
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There is a lot of information about VAT on the web, but some of it may seem confusing or conflicting.  I hope my simple VAT guide to a complex tax may be of help.

Q: I run a business – do I have to charge VAT on my sales?

A: If a business’s turnover exceeds £82,000 in any 12 month period it is likely that it ought to be VAT-registered and charging VAT on its income. It is the business’s responsibility to monitor its turnover and register with HM Revenue & Customs if necessary. However, not all income counts towards the turnover limit, for instance you can ignore exempt income (see below for a description of exempt sales).

VAT registration may also be necessary if you know that your income will exceed the limit in the next 30 days (the future test). This may because you have signed a contract for work for instance.

A business can also VAT register voluntarily.  This is usually done to reclaim VAT it has incurred.

Finally, a business must VAT register if it receives certain goods and services form overseas worth more than £82,000.

Q: What happens if I don’t register for VAT when I should?

A: In addition to paying VAT from the date a business should have registered, there will be penalties and interest to pay. HM Revenue & Customs may carry out further investigations if they consider that failure to register was more than an innocent error.

Q: Why is paperwork so important in VAT?

A: Since VAT is a transaction-based tax, it is important to have evidence of those transactions.

Q: Are there any benefits to being VAT-registered?

A: Yes, you will usually be able to claim the VAT you incur on expenditure for your business.

Q: Can’t I recover all the VAT I incur?

A: Some VAT is specifically blocked, such as: cars for most businesses and business entertainment. In addition, if a business makes exempt supplies, it is usually unable to recover any VAT it incurs in relation to those supplies. Apart from this, as long as the expenditure is for business (not private) purposes, and the business has supporting documentation to support the claim, most VAT is recoverable from HMRC.

Q: Do I charge VAT on everything?

A: No, some sales such as food, books and children’s clothing are zero-rated, and some activities including certain property rental and sales, insurance and health services are exempt from VAT. In addition, sales to most overseas business purchasers may be treated as VAT-free. The difference between exempt and zero-rated is that there is no block on the recovery of VAT incurred in relation to zero-rated supplies so usually a business making solely or substantially zero-rated supplies will actually receive payments from HMRC.

Q: Are there any short-cuts to accounting for, and paying VAT?

A: There are a number of schemes aimed at simplifying VAT. These range from annual (rather than the more usual quarterly) returns, cash accounting (where you don’t need to pay HMRC until you have been paid) to simplified flat rate schemes whereby you pay over an element of your turnover without the need for further calculations

Q: What if I get it wrong?

A: Unfortunately, as with everything connected to VAT, there are penalties and interest for even innocent errors. If HMRC find an error before you have notified them of it, there can be quite swingeing extra amounts to pay over. If HMRC consider that there is deliberate evasion, and evidence is found, a prison sentence of up to seven years is possible.

Q: What should I do if I am uncertain about what the VAT treatments of my sales are, or when I should register for VAT?

A: Please contact me!  Not only can I assist with the technical side, but there is often planning that may be put in place to mitigate the cost of VAT or penalties.

VAT Reliefs for Charities. A brief guide.

By   3 August 2015
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Charity and Not For Profit entities – a list of VAT reliefs.

Unfortunately, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

    • Advertising services received by charities;
    • Purchase of qualifying goods for medical research, treatment or diagnosis;
    • New buildings constructed for residential or non-business charitable activities;
    • Self-contained annexes constructed for non-business charitable activities;
    • Building work to provide disabled access in certain circumstances;
    • Building work to provide washrooms and lavatories for disabled persons;
    • Supplies of certain equipment designed to provide relief for disabled or chronically sick persons;

There are also special exemptions available for charities:

    • Income from fundraising events;
    • Admissions to certain cultural events and premises;
    • Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use.
    • Membership subscriptions to certain public interest bodies and philanthropic associations;
    • Sports facilities provided by non-profit making bodies;

The reduced VAT rate (5%) is also available for charities in certain circumstances:

    • Gas and electricity in premises used for residential or non-business use by a charity;
    • Renovation work on dwellings that have been unoccupied for over two years;
    • Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
    • Installation of mobility aids for persons aged over 60.

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position. I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid.  Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

I have to charge myself VAT?!

By   1 July 2015
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I have to charge MYSELF VAT?!

How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
      1. account for output tax, calculated on the full value of the supply received, in Box 1;
      2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
      3. include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EC Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EC and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you‘re not already registered for VAT in the UK and acquire goods worth £82,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

Intrastat_flow_diagramMore details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile ‘phones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair.  However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

VAT treatment of vouchers, gifts and discounts – How business promotions work

By   25 June 2015
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Business promotions are an area of VAT which continues to prove complex.  This is further exacerbated by changes to the legislation at EC and domestic level and ongoing case law.

The VAT position is summarised here. Part of this commentary has been taken directly from HMRC guidance on the subject and is the most up to date authority on the matter.  I thought it may be useful if the VAT treatment of various business promotion schemes is summarised in one place.

…I recall a statement from an old mentor of mine; “if you have a marketing department you have a VAT problem!”

 

Summary

Offer How to charge VAT
Discounts Charged on the discounted price (not the full price)
Gifts Charged on the gift’s full value – there are some exceptions listed below
Multi-buys Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
Face value vouchers that can be used for more than one type of good or service (multi-purpose) No VAT due, if sold at or below their monetary value
Face value vouchers that can only be used for one type of good or service (single-purpose) VAT due on the value of the voucher when issued
Redeemed face value vouchers Charged on the full value of the transaction at the appropriate rate of the goods provided in return for the voucher

 Exceptions for gifts

There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.

Free goods and services

You don’t have to pay VAT on things like free samples if they meet certain conditions.

Supplies Condition to meet so no VAT due
Free samples Used for marketing purposes and provided in a quantity that lets potential customers test the product
Free loans of business assets The cost of hiring the asset is included in something else you sell to the customer
Free gifts The total cost of all gifts to the same person is less than £50 in a 12 month period
Free services You don’t get any payment or goods or services in return

Background

Face value vouchers

Recent changes, radically alter the UK rules for face value vouchers. Face value vouchers are vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services.

Examples of face value vouchers would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.

Single or multi-purpose

The most important distinction for face value vouchers is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher then little has changed. If it is a single purpose voucher, however, HMRC will now charge VAT when it is issued.

Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.

For example:

  • a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to either books (zero rated) or an e-book download (standard rated) from the same seller will be multi-purpose
  • a voucher which entitles you to £10 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and you can buy a take away with the voucher (or hot food) then it would be multi-purpose. 

The above means that for single purpose vouchers VAT is due whether the voucher is actually redeemed or not; which seems an unfair result. There is no way to reduce output tax previously accounted for if the voucher is not used.