Guidance

Business promotions (VAT Notice 700/7)

Find out how to account for VAT schemes on business gifts, samples and promotional schemes.

Detail

This notice cancels and replaces Notice 700/7 (28 May 2012).

1. Overview

1.1 Information in this notice

This notice explains the VAT treatment of:

  • business gifts
  • samples
  • different kinds of business promotion schemes

It is intended to help you make sure that the correct amount of VAT is accounted for and paid.

It does not cover:

1.2 Changes to this notice

The technical content of section 8 has been updated to take account of developments in both law and policy on vouchers.

Section 9 has been added on the treatment of vouchers issued after 1 January 2019.

Paragraph 2.2 has been amended to clarify the meaning of a gift.

Paragraph 2.14 has been added to explain the treatment of the disposal of obsolete stock.

Other text has been changed to improve readability.

1.3 Who should use this notice

This notice is intended for businesses who:

  • make gifts of goods or services
  • give away goods which are samples of their supplies
  • are involved in business promotion schemes, for example cash-back schemes or where goods or services are given as rewards to either retail or trade customers
  • are involved in the issue, supply or redemption of coupons or vouchers

1.4 Guidance on interpretation

The guidance in this notice is not a part of, and does not override, the law. It reflects our interpretation of the law and current practice. Where a number of examples are given these are not necessarily exhaustive. If you are in any doubt about the VAT liability of your own supplies you should contact our advice service.

2. Gifts of goods

2.1 Free gifts of goods for no consideration

A free gift means that you receive no consideration in the form of money, (monetary consideration), or non-monetary consideration. For more on this see section 5.

If you give away goods and are entitled to recover VAT on them as input tax and you receive no payment or other consideration for them, you must account for VAT on their cost value. That is unless they can be treated as business gifts under paragraph 2.3.

2.2 Definition of a ‘business gift’

A business gift is a gift of goods that is made in the course of promoting your business and for which you were entitled to reclaim the VAT you were charged on its purchase as input tax. By ‘gift’ we mean a definite, voluntary and unconditional transfer of the goods for no consideration.

Business gifts cover a wide range of items from brochures, posters and advertising matter to expensive goods of the kind given as ‘executive presents’.

They also include:

  • long service awards and retirement gifts
  • goods supplied to employees under attendance or safety at work schemes
  • items distributed to trade customers
  • goods given to customers as a ‘thank you’
  • prizes of goods in free lotteries, competitions and dispensed from amusement and gaming machines, read Notice 701/29 for more information

2.3 When to account for VAT on business gifts of goods

You do not have to account for VAT on business gifts made to the same person so long as the total cost of all gifts you make to that person does not exceed £50, excluding VAT, in any 12-month period. To check this it is acceptable for you to adopt any 12-month period that includes the day on which the gift is made.

You must normally account for output tax on the total cost value of all the gifts where the following apply:

  • the total cost of business gifts given to the same person in any 12-month period exceeds £50
  • you were entitled to claim the VAT on the purchase as input tax

How to work out the cost is explained in Notice 700.

2.4 Gifts used for business purposes by the recipient

If you make a gift of goods on which VAT is due, to someone who uses the goods for business purposes, that person can, if they are VAT registered, recover the VAT as input tax subject to the normal rules. You cannot issue a VAT invoice, in order to provide the recipient with acceptable evidence to support a claim for recovery of input tax, you may use your normal invoicing documentation and include the following statement:

‘Tax Certificate - No payment is necessary for these goods. Output tax of £XX.XX (insert amount) has been accounted for on the supply.’

2.5 Gifts of goods by a business for non-business purposes

Gifts of goods made for non-business purposes include those applied to personal use, for example a gift to a relative or friend. If the goods were not purchased to be used for business purposes, they are not business assets and any VAT incurred on their purchase is not reclaimable as input tax.

If input tax has been claimed on goods that are diverted to private use and given away, output tax must be accounted for to the same amount and by the same business that claimed the input tax.

2.6 Sporting or entertainment

Where a business organises an awards ceremony at which prizes or trophies are awarded and the attendees pay an admission fee, then the giving of the prize or trophy is not a deemed supply.

This is because part of the admission fee is regarded as being payment for the trophies and VAT will have been accounted for on that supply if all of the following apply:

  • you do no more than organise an event at which trophies are given away
  • there is no other associated competition or event
  • you charge for admission to see the presentation

2.7 Gifts to charities

Goods you give to a charity or taxable person (who has covenanted all the profits of a subsequent sale to a charity) may be zero-rated, provided the charity or taxable person to whom you have donated the goods sells, lets or exports them.

Find out more information about how VAT affects charities in Notice 701/1.

2.8 Gifts to the general public through an intermediary

You may make gifts to the general public through an intermediary. For example goods provided by you, as a manufacturer, to a retailer for giving away in store to the retailer’s customers. In that case, provided the valuation limits for individual recipients described in paragraph 2.3 are not exceeded, you do not have to account for VAT on the gifts so long as:

  • neither you nor the intermediary charge for them
  • the goods are given in the course or furtherance of your business
  • the customer does not have to do anything in return for the goods
  • the goods remain your property until they are given to the final customer
  • any goods which are not used are returned to you or destroyed

2.9 Gifts as part of business promotions

If you offer additional goods or services with your normal taxable supplies as part of a business promotion, it may be that no further VAT is due. For more information see section 6. If you donate prizes for competitions in newspapers or magazines you may have to account for VAT.

For more information about sponsorship’s read Notice 701/41.

2.10 Gifts of road fuel and meals to employees

Special rules apply if you give away road fuel for private motoring or catering in the form of free meals and drinks to employees.

If you provide road fuel free, or below cost, for private motoring you are making a supply and VAT must be accounted for. Read Notice 700/64 for more information about motoring expenses.

The provision of meals and drinks is covered in Notice 700 under ‘Subsistence and staff entertainment expenses’.

You can also read in Notice 700/65 for more information about business entertainment.

2.11 Sales of goods given to you as gifts

You may receive a gift of goods in a business capacity which you then sell for a consideration. If you do, and are registered for VAT, you must account for VAT on the sale provided the goods are liable to a positive rate of VAT. Special rules apply to charities.

Paragraph 2.4 of Notice 701/1 explains how you may be able to claim input tax.

2.12 Point of sale display material

No VAT is due if you provide point of sale material to retailers, or other business customers, for no consideration and the material provides direct promotional support for your goods. Examples include display stands, posters and similar material.

2.13 Gifts prizes and reward goods given to self employed salespersons

Many businesses involved in direct selling operate sales promotions or incentive schemes. These normally involve gifts or rewards to salespersons in return for:

  • providing specific services
  • reaching specified sales targets
  • meeting some other obligation

The rewards are supplied in return for a non-monetary consideration in the form of the salespersons services - see also section 5.

There are several methods by which salespersons may be rewarded, for example:

  • goods equal in value to a percentage of the total sales achieved may be chosen by the salesperson free of charge, but they have to pay in full for any balance in excess of the reward
  • an option is given to the salesperson to take a cash commission, which may be applied to the purchase of goods at a discount up to a limit related to the sales achieved
  • the salesperson may purchase an unlimited amount of goods at a discount, using their own money, as a reward for services - usually subject to a minimum level of sales achieved
  • a reward of goods free of charge, or at a discount or special price, in return for booking future events or achieving sales
  • a combination of any of the above

This list is not exhaustive, the essential characteristic is that the salesperson is given or is allowed to buy at a discount, or special price, goods in return for achieving sales, providing services, or possibly both. For example, arranging an event, inviting guests and providing refreshments. Similar arrangements can apply to distributors and demonstrators.

In these circumstances VAT is due on the full monetary value of the reward, rather than any lesser consideration that may be paid by the salesperson themselves.

2.14 Disposal of goods

Where goods have been withdrawn from sale because they have reached the end of their economic life (for example the use-by date has been reached or the goods are damaged) and the choice is to donate or destroy them, they can be regarded as no longer an asset of the business and the disposal is not to be treated as a supply for consideration.

3. Gifts of services

3.1 General

If you provide a service to a customer free of charge there is usually no supply, so no VAT is due. If you have bought in the supply of services, any VAT incurred is input tax and therefore may be reclaimable subject to the normal rules. In that case, output tax is due on the services you pass on free of charge.

If you simply pay for a third party to provide services to someone else, any VAT incurred is not deductible by you as input tax since the supply is not to you.

3.2 Business entertainment

Where you have bought in services or goods to be used for the purposes of business entertainment, you will not normally be able to deduct input tax, read Notice 700/65 for more information about business entertainment.

3.3 Provision of accommodation to employees

Read Notice 709/3 if you supply your employees with accommodation on your premises.

4. Samples

4.1 Definition of a sample

We use the following definition of a sample:

‘A specimen of a product which is intended to promote the sales of that product and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions.’

4.2 VAT treatment of samples

If you provide free samples of products to individuals for marketing purposes and they meet the definition in paragraph 4.1, they are not liable to VAT.

4.3 Examples that do not qualify as a sample

A finished item taken from a discontinued line. Although you may intend it to demonstrate the type and standard of that particular range, it could not promote sales of that product line since it is no longer available.

A product provided in quantities greater than necessary for its characteristics and qualities to be assessed. For example, a wine importer may provide a bottle to potential clients as a sample before deciding to buy. However a case of 12 bottles is indicative of there being more than just a sample.

4.4 Sales of goods given to you as samples

If you are registered for VAT and are given samples which you sell for a consideration, then output tax is due on the sale provided the goods are liable to a positive rate of VAT.

5. Non-monetary consideration and business promotions

5.1 Introduction

Where payment for a supply of goods or services is totally in money this is known as monetary consideration. It is also possible to have non-monetary consideration. This occurs when your customer agrees to do, or not to do, something in return for the supply they receive from you. Your customer has provided you with non-monetary consideration for your supply.

5.2 How to value non-monetary consideration

The value of any non-monetary consideration is its monetary equivalent. This is normally the price the customer would expect to pay for the supply if money was the only consideration. In certain circumstances this might be equivalent to the cost of the goods supplied.

5.3 Example of non-monetary consideration

An example of non-monetary consideration is where you offer goods to your customer for a lower price on condition that the customer provides you with a service in return. If your customer fails to provide the service, you will charge your customer the full price of the goods you are supplying. In agreeing to provide this service your customer is providing non-monetary consideration, the value of which is equivalent to the amount of the reduction in the price of the goods.

6. Promotions of goods or services for a single price

6.1 Offers such as ‘buy one get one free’ and ‘meal deals’

Goods, or goods and services, may be offered together in a promotion for a single price. Examples include:

  • buy one get one free
  • buy three for the price of two
  • buy a sofa and get a free foot stool

This also includes ‘meal deals’ where a variably priced sandwich, soft drink and snack or dessert are offered for a set price when purchased together. Alternatively, the offer may involve a set price reduction, say 50 pence, off the total of variably priced items such as sandwiches, soft drinks and crisps.

This is normally referred to as a multiple supply and the total amount you receive from the customer will usually cover all the goods and services involved. If the items offered are liable to different rates of VAT you will usually have to apportion in the normal way.

Notice 700 explains how to do this.

For minor items linked with a major item that is liable to a different rate, the linked supplies concession may apply.

6.2 The linked supplies concession

The linked supplies concession applies where a minor article is linked, not necessarily physically, with a main article which has a different VAT liability.

The price paid should normally be apportioned you may, as a concession, account for VAT on the minor article at the same rate as the main article - as long as the minor article:

  • is not charged to the customer at a separate price
  • costs you no more than 20% of the total cost of the combined supply (excluding VAT)
  • costs you no more than either:
    • £1 (excluding VAT) if included with goods intended for retail sale
    • £5 (excluding VAT) otherwise

If your supply meets the above conditions, the articles do not need to be detailed separately on your invoice.

Notice 701/10 has more information about goods linked with printed matter.

In all other circumstances where you have to issue a VAT invoice the minor article must be shown.

Read Notice 700 and Notice 700/21 for more information on invoicing.

6.3 Multisave promotions subsidised by a manufacturer

Manufacturers sometimes make payments to retailers towards the costs of promotions such as buy 3 items for the price of 2. If the payments relate to products that are liable to VAT at a positive rate, manufacturers can reduce their output tax by the amount of VAT included in the payment to the retailer. If the payment relates to products having different rates of VAT you will usually have to apportion the payment in the normal way.

If you receive these payments as a retailer, they represent further consideration for the supply to the customer and so you must account for VAT. They should be included with retail scheme takings. Read Notice 727 for more information.

On the other hand, the manufacturer may pay you for providing a service to them, for example to advertise the promotion or the products. You must account for VAT at the standard rate outside any retail scheme. This, in turn, is the manufacturer’s input tax subject to the normal rules.

7. Coupons

7.1 Definition of money-off coupons

These are coupons issued to the public offering a reduction in the price of a future purchase. Money-off coupons are also commonly referred to as discount vouchers. They can be issued in a variety of ways, for example:

  • when another article is bought
  • when purchasing goods to a specific value
  • by mail-shot or electronic means
  • as cut-out coupons in newspapers or magazines

They include coupons issued by retailers under their own schemes, or by manufacturers. In either case it does not matter whether the coupon is attached to a product or not.

7.2 Issue and sale of coupons

Normally money-off coupons are issued for no payment or consideration. Even where the issue is linked to the purchase of goods, there is no VAT due on the coupon provided the goods themselves are sold at their normal price. If a value is given to the coupon by a price differential then the following paragraphs will apply.

If you sell money-off coupons, discount coupons or discount cards, which entitle the holder to discounts from:

  • other businesses, then this is a standard-rated supply and you are required to account for VAT
  • yourself then the payment should be accounted for based on the liability of the underlying supplies

For more information, read:

7.3 Redemption of coupons

When you redeem your own money-off coupons and you operate a retail scheme, you need only include any payment received from the customer in your daily gross takings. Where you redeem a third party coupon, for example from a manufacturer, then the value of the coupon must also be included in your daily gross takings, along with any other payment received from the customer. You should follow the rules set out in the relevant Retail Scheme notice appropriate to your business. These are listed in paragraph 1.1.

If you do not operate a retail scheme VAT is to be accounted for, at the time of supply, on:

  • the amount due from the customer
  • plus any further payment due, - for example, from the manufacturer

Reimbursement or payment for supplies of goods or services from anyone other than your customer is still part of the consideration for the supply to the customer. A VAT invoice must not be issued to anyone other than the customer.

Where coupons alone are accepted as payment for goods or services, VAT may be due under the business gift rules explained in section 2 for goods and section 3 for services.

7.4 Handling charges

If you make a charge for handling, promoting or advertising coupons, this represents consideration for a supply of your services. The supply is taxable and so you will be required to account for VAT.

This does not apply where, after the coupon has been redeemed, you present it to a third party to be exchanged for money.

At that stage it becomes a security for money and any charges made for handling the coupons after this point are exempt for VAT purposes.

8. Face value vouchers issued before 1 January 2019

8.1 Definition of face value vouchers

Face value vouchers are vouchers, tokens or stamps with a cash value stated on them or recorded, for example electronically, within them.

Examples include:

  • gift cards or vouchers
  • phone cards
  • book tokens
  • electronic top-up cards

They are normally supplied for a consideration and provide a right to receive goods or services to their face value. A face value voucher may be used as part payment for a more expensive supply of goods or services.

8.2 Issue of a face-value voucher

By issue we mean the voucher has been given value and is capable of being used to purchase goods or services for that value.

8.3 Types of face value voucher

Face value vouchers are separately defined as:

  • single purpose vouchers
  • credit vouchers
  • retailer vouchers
  • other kinds of voucher

Postage stamps are also face value vouchers if they represent a right to receive postal services. They are covered in paragraph 8.8.

8.4 Single purpose vouchers

8.4.1 Definition of single purpose Voucher

A face value single purpose voucher is one that carries the right to receive only one type of goods or services which are all subject to a single rate of VAT.

By “one type” of goods or services this means the supplies have very similar characteristics.

For example a cinema operator’s vouchers which can only be redeemed for a ticket to watch film would be a single purpose voucher. If that voucher could also be redeemed for food or merchandise, as these are supplies of more than one type the voucher would not be a single purpose voucher.

Other examples of single purpose voucher:

  • prepaid telephone cards that can only be used for making calls
  • electronic download vouchers, where they can only be redeemed for downloads, electronic apps, file streaming or other electronically supplied services
  • vouchers for admission to amusement parks which cannot be exchanged for other goods and services in the park

8.4.2 VAT Treatment of a single purpose voucher

A single purpose voucher is treated as the supply of the goods or services for which it can be redeemed. VAT should be accounted for when the voucher is initially sold and at each stage of any supply chain through distributors (with input tax recovery) through to the final user of the voucher.

For example a health spa produces vouchers that entitle the holder to £10 worth of beauty treatment. It sells a voucher to a distributor for £8 and accounts for VAT on the £8. The distributor recovers the input tax and sells the voucher to a retailer for £9 and accounts for VAT on £9. The retailer recovers the input tax and sells the voucher to the final consumer for £10 and accounts for output tax on £10.

There is no further VAT due when the voucher is redeemed as it has already been accounted for.

8.5 Credit vouchers

Credit vouchers are face value vouchers that are issued by a person who cannot themselves redeem them for goods or services. These are typically gift vouchers that are administered by trade bodies or associations and can be redeemed at a number of different retailers.

Consideration for the supply of a credit voucher is disregarded for VAT purposes except to the extent that it exceeds the face value.

Where the voucher is used to purchase goods or services taxed at a positive rate the redeemer of the voucher is liable to account for VAT at the time when the goods or services are supplied.

Normally VAT must be accounted for on the full face value of the voucher. The only exception to this is where it can be shown that the consumer paid a lesser amount for the voucher than its face value. If the redeemer receives no more for the voucher than this lower amount, the VAT to be accounted for at redemption can be based on the lesser amount paid by the consumer.

8.5.1 Statement of practice about credit vouchers

The legislation allows HMRC to collect VAT from any person selling credit vouchers. This includes the issuer, along with subsequent intermediaries where the redeemer fails to account for any VAT due. We have undertaken to enforce this only in the event of a deliberate attempt to avoid paying the VAT.

We will not require the issuer to account for any VAT due if the redeemer makes a genuine error that can be corrected or becomes insolvent. If that happens we will look to collect the VAT due from the redeemer – provided of course that the issuer has passed the funds on to the redeemer.

8.6 Retailer vouchers

Retailer vouchers are face value vouchers that are issued, and may be redeemed for goods or services, by the same person. For example, a gift voucher issued and redeemed by a high street retailer.

The consideration for the issue of a retailer voucher is disregarded except to the extent that it exceeds the face value. Any VAT is accounted for at the time the voucher is redeemed for goods or services on the value for which the voucher was initially sold.

Any supply of a retailer voucher, following the first supply by the issuer, is treated in the same way as the supply of other kinds of vouchers described in paragraph 8.7.

Where a retailer voucher can be used to obtain goods or services from a third party, it is the responsibility of that third party to account for the VAT on those goods or services.

8.6.1 Statement of practice about retailer vouchers

The legislation allows HMRC to collect VAT from the issuer who first sold a retailer voucher if the redeemer fails to account for any VAT due. We have undertaken to enforce this only in the event of a deliberate attempt to avoid paying the VAT due.

We will not require the issuer to account for any VAT if the redeemer makes a genuine error or becomes insolvent. If that happens we will look to collect the VAT due from the redeemer – provided of course that the issuer has passed the funds on to the redeemer.

8.7 Other kinds of voucher

Face value vouchers that are not credit vouchers or retailer vouchers are classified as ‘other kinds of voucher’. All such vouchers are subject to VAT at the appropriate rate on their sale. For example, if a high street retailer sells gift vouchers to an intermediate supplier, the onward sale of the retailer vouchers by the intermediate supplier is liable to VAT on the full consideration.

VAT should be charged at the standard rate, except where it is known that the voucher can be redeemed either fully, or in part, for zero-rated or reduced-rated goods or services. In that case, the voucher may follow the zero or reduced rate throughout the supply chain. Alternatively it can follow the split in liability recorded on the VAT invoice from the redeemer as described in paragraph 8.9.

8.8 Postage stamps

Valid UK and Isle of Man postage stamps, purchased in the UK and Isle of Man, are payment for postal services and are exempt from VAT. They can pass from the issuer, through any intermediate suppliers and on to the final customer, without VAT being accounted for. This only applies so long as they are sold at, or below, face value. You must account for VAT at the standard rate on any amount by which the price charged exceeds the face value of the stamp.

All used stamps and all foreign stamps, even if they are valid for postage abroad, are liable to VAT at the standard rate when sold in the UK and Isle of Man.

Read Notice 701/8 for more information.

8.9 Intermediaries

8.9.1 Credit vouchers

As the consideration for a supply of a credit voucher is disregarded for VAT purposes tax invoices should not be issued. That means no VAT is due on the supply of credit vouchers, nor is input tax deductible on their purchase. Only if the consideration received exceeds the face value is there a requirement to bring VAT to account. This VAT is only due on the amount by which the consideration exceeds the face value.

8.9.2 Retailer vouchers

Issuers of retailer vouchers who redeem them for goods or services that are liable to VAT, will need to issue a full VAT invoice if the vouchers are sold to a VAT registered intermediate supplier. The issuer does not need to account for VAT until the voucher is redeemed.

We suggest that you include the following on your invoice:

‘The issuer of the voucher will account for output tax under the face value voucher provisions in Schedule 10A VAT Act 1994’.

Intermediate suppliers may deduct the VAT on this invoice subject to the normal deduction rules. Subsequent supplies of retailer vouchers are to be treated as supplies of “other vouchers” (paragraph 8.9.3).

8.9.3 Other vouchers

Issuers and intermediate suppliers of other vouchers will need to issue a full VAT invoice if the vouchers are sold to a VAT registered intermediate supplier.

Suppliers of other vouchers must account for VAT on the sale of the vouchers at the time the vouchers are sold. Subject to 8.9.4 the rate of VAT to apply is the standard rate.

8.9.4 Adjustments

An adjustment to the VAT accounted for may be made by an intermediate supplier if it is known that the voucher has been redeemed for goods or services that fall within one of the following VAT categories:

  • zero-rated
  • reduced-rated
  • exempt
  • outside the scope of VAT

Both input tax and output tax will need to be adjusted to reflect the liability of the final supply.

Where the intermediate supplier knows in advance that the voucher can be redeemed for goods or services falling into one of the above categories, they may use a percentage split from the outset and so avoid making later adjustments.

Information about any split in liability can only be provided by the person who redeems the voucher. As a simplification redeemers can base adjustment figures on retail scheme percentages or other relevant calculations, provided the result is fair and reasonable.

If the redeemer chooses to make this information available they should include the percentage split on any VAT invoice they issue to an intermediate supplier. This split should be used throughout the supply chain of the relevant vouchers.

8.10 Place of supply

The normal place of supply rules apply to vouchers. Read Notice 741A for more information.

8.11 Face Value Vouchers and retail schemes

You should refer to the guidance in the notices covering retail schemes or bespoke retail schemes.

8.12 Face value vouchers as part of a package (composite transaction)

The supply of the voucher is treated as supplied for no consideration if:

  • a voucher is supplied in conjunction with a supply of goods or services to that same person and
  • the consideration for the supply is not significantly different from that which would be due were the voucher not included in the package . Examples of a face value voucher provided as part of a package include a:

  • hotel issuing a face value voucher when a customer settles their bill - the customer does not have the option of a price reduction in lieu of the voucher
  • retailer giving customers a face value voucher on purchases over a certain amount - again the customer does not have the option of a price reduction in lieu of the voucher
  • retailer selling a mobile phone boxed with a phone card - similarly, the customer does not have the option of refusing the phone card for a reduction in the price of the phone

In each case the face value voucher is part of a package or similar composite transaction and the price of the package is not adjustable if the customer refuses the voucher. In these circumstances the voucher is treated as supplied for no consideration and so a reduction in the value of the original supply is not appropriate.

The treatment of the supply of the redemption goods or services will depend on the type of voucher and the circumstances of the issue and redemption of the voucher. See section 8.13.

8.13 Face value vouchers given away for no consideration

8.13.1 Intermediary business

Where face value vouchers are purchased by businesses to give away for no consideration, for example as part of a promotions scheme, any VAT charged on the purchase of the vouchers may be recovered as input tax subject to the normal rules. Output VAT may have to be accounted for on vouchers given away for no consideration in accordance with earlier sections of this notice.

8.13.2 Salary sacrifice

Some employers make vouchers available to employees in return for a reduction in salary (salary sacrifice). The amount of salary sacrifice should be treated as the consideration for the sale of the voucher.

8.13.3 Retailer’s own vouchers

If you give away single purpose vouchers that is likely to be treated as a deemed supply of the voucher and the treatment will follow that which would apply if the goods or services themselves were given away.

If you give retailer vouchers away free to a customer who redeems them with you without making a further payment, that is likely to be treated as a discount voucher.

The exact treatment will depend on the circumstances of the issue and redemption.

8.14 VAT status of vouchers following redemption

Face value vouchers that give a right to goods or services are not security for money until the voucher can be exchanged for money, at which point any consideration is exempt. For example, a voucher presented to a retailer as payment for goods or services is not at that time a security for money.

This changes when the retailer presents the voucher to a third party to be exchanged for money. It is at that point that it does become a security for money.

8.15 Unredeemed vouchers

8.15.1 Single purpose vouchers

No VAT adjustment can be made if the voucher is not used or not used for its full value, unless a refund is made.

8.15.2 Credit, retailer and other vouchers

If the voucher is never used there is no VAT to be brought to account because the issue of the voucher has been disregarded and there has been no taxable supply of goods or services.

9. Vouchers from 1 January 2019

9.1 Definition of voucher

A voucher is defined as being all of the following:

  • either a physical or electronic instrument
  • that carries an entitlement to be accepted as consideration for the provision of goods or services
  • where either or both of the goods or services for which it may be accepted, and the persons under an obligation to accept it as consideration for those goods or services, are limited and are stated on or in it
  • which is transferable by gift

Examples include:

  • gift cards or vouchers
  • Pay as You go phone cards
  • book tokens

By “limited” the law means that an instrument is confined to specified products or specified suppliers, as opposed to a money instrument which can generally be used anywhere to purchase anything.

9.2 What is not a voucher

  • travel or admission tickets
  • postage stamps
  • discount vouchers
  • sim cards
  • electronic money, credit cards or similar mechanisms for making payments
  • keys or codes giving access to software
  • vouchers that are “non-transferable”

9.3 Issue, transfer and redemption of a voucher

Although the issue and any transfer of a voucher represents the underlying goods or services, the time of supply will depend on the type of voucher issued or transferred – single purpose vouchers paragraph 9.4 and multi-purpose vouchers paragraph 9.5.

9.3.1 Issue of a voucher

By issue we mean the voucher has been given value and is capable of being used to purchase goods or services for that value. The issue of a face value voucher is to be treated as the supply of the relevant goods or services for which it can be redeemed. Once it is ‘issued’ to a third party in return for payment, it is given, or has acquired, a value and is capable of being used to receive goods or services.

9.3.2 Transfer of a voucher

By transfer we mean that the voucher is passed on to another person, usually (but not necessarily) in return for a sum of money or a non-monetary consideration. The transfer of a face value voucher is to be treated as the supply of the relevant goods or services for which it can be redeemed. The VAT treatment depends on whether it’s a single purpose voucher or a multi-purpose voucher.

9.3.3 Redemption of a voucher

Redemption means that the voucher is accepted by a supplier (the redeemer) as payment (or part payment) in return for a supply of goods or services. The redemption of the voucher as consideration for the supply of the relevant goods or services is not a transfer of the voucher.

9.3.4 Specific cases

In the case of pre-paid phone cards the redemption is when the value is added to the account related to a phone number.

9.4 Single purpose vouchers

9.4.1 Definition of single purpose voucher

A single purpose voucher is one where, at the time of issue, the liability to VAT of the goods or services to which it relates, and the place where they will be supplied (either the UK or another country or territory) are known. Find out what the current VAT rates are.

For example a UK cinema operator’s voucher which can be redeemed for a ticket to watch film or for food (for consumption in the cinema) or merchandise; these are all standard rated supplies so the voucher is a single purpose voucher.

Other examples of single purpose voucher:

  • pre-paid telephone cards that can only be used for making calls
  • electronic download vouchers, where they can only be redeemed for downloads, electronic apps, file streaming or other electronically supplied services
  • vouchers that can be exchanged for admission to amusement parks or can or for other goods and services of a single VAT rate in the park
  • perfume vouchers

If the voucher can be exchanged for a supply of the goods or services in more than one country then it cannot be a single purpose voucher.

A voucher that can only be used to purchase children’s clothes by a retailer that has shops in both the UK and Channel Islands would not be a single purpose voucher because it can be used in more than one country (for the purposes of VAT the Channel Islands are not part of the UK).

9.4.2 Place of supply

Notice 741A sets out the rules on the place of supply of services and Notice 700 explains the rules for goods.

The place of supply for single purpose vouchers is where the goods or services for which the voucher can be redeemed take place.

Whether the voucher itself is sent cross-border does not affect whether it is a single purpose voucher or not.

9.4.3 VAT Treatment of a single purpose voucher

A single purpose voucher is treated as the supply of the goods or services for which it can be redeemed. Where that supply is a taxable supply, VAT should be accounted for as appropriate when the voucher is initially sold and at each stage of any supply chain through distributors (with input tax recovery) up until and including its sale to the final user of the voucher.

For example a health spa produces vouchers that entitle the holder to £10 worth of beauty treatment. It sells a voucher to a distributor for £8 and accounts for VAT on the £8. The distributor recovers the input tax and sells the voucher to a retailer for £9 and accounts for VAT on £9. The retailer recovers the input tax and sells the voucher to the final consumer for £10 and accounts for output tax on £10.

With the exception of the situation described in paragraph 9.4.4, no further VAT due when the voucher is redeemed as it has already been accounted for. No VAT adjustment can be made if the voucher is not used or not used for its full value, unless a refund is made.

9.4.4 Deemed supply on redemption

If the single purpose voucher was issued by a different person than the redeemer then there is a deemed supply of the goods or services to which the voucher relates to that issuer. Where the goods are subject to VAT at the standard rate or a reduced rate, VAT must be brought to account by the redeemer.

9.4.5 Other factors to consider

(i) If a voucher can be used to purchase goods which are normally supplied at a single rate of VAT but in specific circumstances might also have a different liability then that cannot be a single purpose voucher, unless one or other use is specifically excluded from the use of the voucher.

Examples:

  • vouchers which can also be redeemed by persons entitled to relief from VAT on disability grounds.
  • vouchers that can also be redeemed for goods that are to be shipped overseas as zero-rated exports.
  • retailers that operate “airside” tax free shops; this does not include sales under the Retail Export Scheme which are subject to a post-supply adjustment.

(ii) Post-supply VAT liability adjustments (for example for use and enjoyment of some services) will not normally prevent a voucher being treatment as a single purpose voucher.

(iii) Also vouchers that can be exchanged for goods or services sold under a margin scheme cannot be a single purpose voucher. This is because VAT is due on the margin and not the value of the supply.

9.4.6 Invoicing

Subject to the normal rules for invoicing an issuer or transfer or of a single purpose voucher should issue a tax invoice to their customer for the sale of the voucher.

Where only the voucher is used in order to purchase goods or services, no tax invoice should be issued by the redeemer to their customer. However, for the purposes of VAT accounting, if the customer pays an additional amount for the redemption supply the supplier can issue a tax invoice for that additional amount to the customer.

Where the final redeemer of the voucher is deemed to make a supply of the redemption goods or services to the issuer (9.4.4) they should issue a tax invoice to them.

9.4.7 Input tax

The issue of a single-purpose voucher, and its subsequent transfer, will represent a supply of the underlying goods or services and any VAT payable is due at this time. The consideration for the supply will be the amount charged for the issue and transfer of the voucher. The persons making these supplies will be entitled to deduct input tax, subject to the normal rules.

If the issuer and redeemer are the same person, there is no supply upon redemption, the redeemer can recover input tax (subject to the normal rules). The VAT is due on the supply of the underlying goods which took place when the voucher was issued.

If the issuer and redeemer are different people, there is no supply upon redemption. The redeemer is deemed to have made a supply to the issuer. The redeemer can recover input tax (subject to the normal rules) because the VAT is due on the supply to the issuer.

9.5 Multi-purpose vouchers

A multi-purpose voucher is any voucher that is not a single purpose voucher.

9.5.1 Issue or transfer of a multi-purpose voucher

The consideration for the issue or transfer of an multi-purpose voucher is disregarded at every stage. This is because any VAT becomes due when the goods are handed over or the services are provided in return for the voucher.

9.5.2 Value of the multi-purpose voucher on redemption

For the purposes of calculating the VAT due on redemption, the value of the voucher is its face value or the consideration paid at its most recent supply where that is known to the person accepting the voucher as consideration.

For example

By “end customer” we mean the person who purchased the voucher with either the intention of using it themselves or of gifting it to someone else to use.

Where a voucher is sold to the end customer for £90 but it has a face value of £100. The seller of the goods or services must account for the voucher as being for £100 unless they know that it was last sold for the £90. The gifting of an issued voucher for no consideration does not create a value.

For example

If P purchases a £50 multi-purpose voucher for £49 and gifts it to C, who then purchases £50 worth of goods or services from R, the value of R’s supplies to C is £50 or, if this is known, £49. It is not £0 on the basis that C paid nothing for the multi-purpose voucher.

The face value is the amount stated on or recorded in the voucher or otherwise understood to be the value for which it is accepted by all parties to the redemption transaction. This may be stated in the terms and conditions or promotional material.

A multi-purpose voucher issued for no consideration may have a value of £0 when redeemed if all the other conditions are met.

9.6 Input tax deduction

The consideration for the issue or transfer of a multi-purpose voucher is disregarded for VAT purposes so there is no output tax to account for on the issue or transfer. This means that the issue and transfer of a multi-purpose voucher in isolation is not regarded as a supply which would permit the deduction of input tax.

Where the issue or transfer of multi-purpose vouchers is done in order to facilitate a different supply, or is a necessary part of a different supply, VAT incurred in relation to the entire activity may be deductible as input tax (where, of course, it is a taxable activity). The extent of this will depend on individual circumstances, an important factor is whether the issue or transfer of multi-purpose vouchers is subsumed within a wider commercial activity.

For example in the case of a retailer that issues its own multi-purpose vouchers, so they are used later to purchase goods or services from that retailer, the VAT incurred in relation to the issue of the multi-purpose vouchers is attributable to the supply of those goods or services. Where a voucher is not redeemed, the VAT becomes an overhead cost.

A business which supplies promotional or marketing services, and ancillary to this is the issue or transfer of multi-purpose vouchers, may be able to attribute the VAT it incurs to those promotional or marketing services. A trade organisation which supplies a vouchers management service to its members, issuing vouchers on their behalf, may be able to attribute the VAT it incurs to those membership services.

Input tax that relates to a number of activities may need to be apportioned using a fair and reasonable method using similar principles to those set out in section 32 of Notice 700.

9.7 Agents

Where an agent acts in their own name in connection with the purchase and resale of vouchers that is to be treated as a supply to the agent and a supply by the agent.

Agents who facilitate the supply of a voucher from an issuer (or intermediary) to another intermediary or end customer on a commission basis will be subject to the normal rules for a taxable supply of agency services.

Read Notice 700 for more information.

9.8 Vouchers as part of a package (composite transaction)

This is an anti-avoidance measure. The supply of the voucher is treated as supplied for no consideration where:

  • a voucher is issued or transferred in conjunction with a supply of goods or services to that same person and
  • the consideration for the supply is not significantly different from that which would be due were the voucher not included in the package

Examples of a face value voucher provided as part of a package include:

  • a hotel issuing what they claim to be a voucher when a customer settles their bill - the customer does not have the option of a price reduction in lieu of the voucher
  • a retailer giving customers a voucher on purchases over a certain amount - again the customer does not have the option of a price reduction in lieu of the voucher
  • a retailer selling a mobile phone boxed with a phone card - similarly, the customer does not have the option of refusing the phone card for a reduction in the price of the phone

In each case the voucher is part of a package or similar composite transaction and the price of the package is not adjustable if the customer refuses the voucher. In these circumstances the voucher is treated as issued or transferred for no consideration and so a reduction in the value of the original supply is not appropriate.

The treatment of the supply of the redemption goods or services will depend on the type of voucher and the circumstances of the issue and redemption of the voucher. See section 8.13.

9.9 Vouchers and retail schemes

You should refer to the guidance in the notices covering retail schemes or bespoke retail schemes.

9.10 Vouchers given away for no consideration

9.10.1 Intermediary business

Where vouchers are purchased by businesses to give away for no consideration, for example as part of a promotions scheme, any VAT charged on the purchase of the vouchers may be recovered as input tax subject to the normal rules. Output VAT may have to be accounted for on vouchers given away for no consideration in accordance with earlier sections of this notice.

9.10.2 Salary sacrifice

Some employers make vouchers available to employees in return for a reduction in salary (salary sacrifice). The amount of salary sacrifice should be treated as the consideration for the sale of the voucher.

9.10.3 Retailer’s own vouchers

If you give away single-purpose vouchers that is likely to be treated as a deemed supply of the goods or services and the treatment will follow that which would apply if the goods or services themselves were given away.

If you give multi-purpose vouchers away free to a customer who redeems them with you without making a further payment, that is likely to be treated as a discount voucher.

The exact treatment will depend on the circumstances of the issue and redemption.

9.11 VAT status of voucher following redemption

Vouchers, that give a right to goods or services are not security for money until the voucher can be exchanged for money, at which point any consideration is exempt. For example, a voucher presented to a retailer as payment for goods or services is not at that time a security for money. This changes when the retailer presents the voucher to a third party to be exchanged for money. It is at that point that it does become a security for money.

9.12 Unredeemed vouchers

9.12.1 Single-purpose vouchers

No VAT adjustment can be made if the voucher is not used or not used for its full value, unless a refund is made.

9.12.2 Multi-purpose vouchers

If the voucher is never used there is no VAT to be brought to account because the issue of the voucher has been disregarded and there has been no taxable supply of goods or services.

10. Cashbacks

10.1 Definition of cashback

The term ‘cashback’ refers to a payment made by a manufacturer directly, or through a recovery agency, to the customer of a wholesaler or retailer. Manufacturers discount schemes, volume bonuses and other terms may also be used.

Payments to trade customers are often in recognition of the volume of purchases. Payments to the public are normally in respect of individual, product-specific, promotions. Because these payments occur outside the direct supply chain credit notes cannot be used.

Manufacturers providing cashbacks are entitled to reduce the VAT accounted for on their sales, provided they charged and accounted for VAT on the original supply.

If you are VAT registered and you receive a cashback, it reduces the taxable value of your purchase and so you must reduce your input tax accordingly. Any cashback payment from manufacturer to customer, that does not affect the wholesaler, does not require the wholesaler to make any VAT adjustment.

10.2 Cross border cashbacks

Where cashbacks are paid between businesses in the UK and EU member states, no VAT adjustments should be made. This means that:

  • where a UK manufacturer pays a cashback to a recipient in an EU member state, the manufacturer cannot reduce their output tax
  • where a UK recipient receives a cashback from a manufacturer in an EU member state, no input tax reduction is required by the recipient

10.3 Cashbacks and changes of liability in the supply chain

There are circumstances where the VAT liability of the goods changes in the supply chain. Where the cashback relates to goods that were supplied VAT-free to the person receiving the cashback, no adjustments can be made by the manufacturer. For example, a charity buys goods zero-rated from a wholesaler, but which were standard-rated for VAT when supplied by the manufacturer. In that case the manufacturer cannot reduce its output tax if it pays a cashback to the charity.

10.4 Cashbacks provided by an intermediary

This can occur when an intermediary arranges for a customer to be signed up with a service provider and, as an incentive, the intermediary provides reimbursement to the customer after a period of time. The reimbursement is often funded from the intermediary’s commission.

As the intermediary is not providing the primary service, the cashback cannot be treated as reducing the consideration payable by the customer for that service. The intermediary cannot make any VAT adjustments in these circumstances. The payment is an inducement and does not reduce the consideration paid by the customer for the supply.

11. Loyalty schemes

11.1 Introduction

There are currently a large number of different schemes designed to increase turnover and maintain customer loyalty. They do this by linking purchases from a business to a reward, or reduction in price on subsequent purchases, by the issue of points. They are seen as a marketing tool that offers retailers an opportunity to collect accurate customer data.

In some cases the reward may be provided by the original supplier. In other schemes they may be obtained from a third party who is contracted to provide the rewards for which they receive payment from the original supplier or from a scheme promoter.

These schemes are commonly used not only by retail outlets, they are also used by manufacturers and other suppliers to encourage continued customer loyalty.

11.2 Example of a loyalty scheme

A typical retail example is a scheme where members of the public or businesses can register as ‘collectors’. They accumulate points on qualifying purchases of goods or services and subsequently redeem the points for rewards.

These rewards can be either goods or services and may be obtained:

  • directly in return for the points
  • for vouchers previously exchanged for the points
  • by a combination of points and any additional payment

11.3 More complex schemes

More complex loyalty schemes may involve a promotion business running the points scheme. This can result in multiple sponsors, multiple reward suppliers and some sponsors that are also reward suppliers. Each stage of the scheme needs to be examined carefully to confirm the correct VAT treatment. There is such a great variation in the structure, mechanism and operation of loyalty schemes of this kind that it is not practical to set out a full guide to the VAT treatment in this notice.

If you are involved in any part of a loyalty scheme and having considered the general principles and examples set out here, you are still not sure of the correct VAT treatment, then you should write to your usual HMRC point of contact for advice.

11.4 Payments to third party reward suppliers

Payments made by a business to a third party reward supplier usually represent third party consideration for supplies made by the reward supplier to the collector. Any VAT charged by the reward supplier cannot therefore be reclaimed as input tax by the paying business as the supply is to the collector.

The reward supplier should account for VAT on goods and services supplied to the collector in the usual way. The consideration will typically be the total of anything in the way of payment received from the collector, plus any consideration received from the sponsor supplier, manufacturer, or promoter.

11.5 Points schemes

Where a collector exchanges points for face value vouchers the VAT treatment is described in section 8. Your points scheme may allow customers to donate points to schools or other institutions. The schools, or others, may then redeem them with you for goods which you supply free of charge. Where this happens you should account for VAT as described in section 2.

11.6 Points given to your customer’s employees

You may run a promotion to reward your customer’s employees - for example the staff of a retailer to whom you make supplies. When the staff redeem points with you this results in you making free supplies of goods or services. They are liable to VAT as explained in section 2 for goods and section 3 for services.

11.7 Loyalty discount Cards

Retailers may provide loyalty cards free of charge to customers allowing them to purchase further goods and services at a reduced price. In these circumstances only the amount of consideration actually received by the retailer is the taxable amount on which VAT is required to be accounted for.

11.8 Promoters who are a separate entity to the supplier or redeemer

This applies where the promoter of a reward scheme is a separate entity to the supplier who issues points with primary purchases. Any charge made by the promoter to the supplier for participation in the scheme represents consideration for a taxable supply. This applies whether the charge equals the value of points issued, or if another basis of charging is used. VAT must be accounted for by the promoter.

In these circumstances the promoter may reimburse third party reward suppliers for the value of points redeemed in supplying rewards to collectors. Any VAT charged by the reward supplier is not usually reclaimable as input tax by the promoter – see paragraph 11.1.

You will need to contact us for advice in cases where you believe that any charge made by you as a reward supplier is for a service of redemption or marketing services to the promoter, rather than for a supply to the collector.

11.9 Supplies of rewards partly or wholly for points

If you are a reward supplier in a loyalty scheme, the supply of the reward is from you to the collector presenting the points.

Where consideration is provided by the collector, in addition to points, or by a third party business or promoter, VAT must be accounted for by you based on the total consideration received.

Where you supply goods wholly for points and receive no payment either from the collector or a third party then you will need to consider the business gifts rules as described in section 2.

12. Manufacturer’s trade promotions

12.1 Vouchers and trade reward schemes

Manufacturers often run promotions to encourage greater purchases of their premium goods.

Examples include:

  • the issue of vouchers, or proof of purchase, with the sale of the premium goods which can be redeemed later for further goods - under this type of promotion the redemption goods are provided for no consideration and so must be treated as described in section 2
  • a trade reward scheme where rewards are offered on condition that a single trade order of a specified size is placed - we accept in principle that the manufacturer, in costing the promotion, will have allowed for the cost of the redemption goods within the normal selling price of the premium goods - no further VAT is required to be accounted for on the reward goods

12.2 Trade orders over a period of time

You may run a promotion where rewards are offered on condition that trade orders are placed over a set period of time to a given level. In that case the rewards are being provided for no consideration. These supplies should be treated as business gifts and VAT may be required to be accounted for as described in section 2.

We will accept that these rewards may be treated as part of a combined, or multiple supply if the rewards:

  • are of a kind to be used in the recipient’s business
  • are not intended for the personal use of the person receiving them
  • appear on the final qualifying invoice, that is to say at the point at which the trade customer qualifies for the reward

The same rules also apply where the manufacturer arranges the supply of the reward goods, the premium supplies may have been obtained through a wholesaler. For example the:

  • manufacturer supplies the reward direct to the customer
  • wholesaler supplies the reward on behalf of the manufacturer from their own stock and the manufacturer either reimburses the wholesaler or replaces the stock
  • wholesaler supplies the reward from stock provided for this purpose by the manufacturer

12.3 Non-business use of reward goods

A VAT registered customer, who is entitled to input tax deduction, and who gives away the reward goods they receive, is making a supply of those goods. VAT may be required to be accounted for as described in section 2.

A VAT registered customer who retains ownership of the goods but uses them, or allows them to be used, for private or other non-business purposes, is likely to be making a supply of services on which VAT should be accounted for. If you are a retailer who intends to use the reward goods as stock for resale, the value must be included in any retail scheme calculation.

12.4 Vouchers that can be swapped for goods or services from a third party

A customer may redeem vouchers directly with a third party for goods or services. The third party later charges the manufacturer for what they have supplied to the customer. Depending on the nature of the scheme, the payment by the manufacturer may be third party consideration for the supply made to the customer. Any VAT charged by the redeemer will not then be input tax for the manufacturer, as the goods or services are provided directly to the customer rather than to the manufacturer.

12.5 Loyalty points swapped for vouchers

If your loyalty points are collected and swapped for vouchers, for example gift vouchers, redeemable with you, no VAT is due at that point. If the face value voucher is used at one of your own outlets, it is treated as a discount voucher or coupon and you should follow the rules described in section 7.

For example, if your loyalty points are exchanged for vouchers your customer uses these vouchers as part payment, VAT is due as follows:

  • part payment £80 cash plus £10 voucher. VAT is due on the £80 subject to liability
  • payment for the £90 item solely with £90 worth of vouchers - VAT may be due subject to the business gift rules described in section 2 for goods and section 3 for services

12.6 Retrospective discounts

You may allow a discount on condition that your customer reaches a target purchase level within a set time. Normally you would issue a credit note, either with or without VAT, if that target is achieved. Notice 700 explains more about credit notes.

If instead you supply the customer with goods to the value of the discount earned, the discount will be treated as having been used to pay for the additional goods supplied.

Where all the goods have the same VAT liability no adjustment to the VAT is required, you may issue a “no-charge” invoice as long as:

  • the reward goods are supplied to the same person and for business purposes
  • you do not issue credit notes with VAT
  • you are able to satisfy us that there is a proper audit trail

However, where the goods the different VAT liabilities an adjustment to the VAT will be required by both you and your customer.

12.7 Goods given to your customer’s employees

Goods supplied free of charge to your customer’s employees, as a reward for promoting and selling your goods, are treated as business gifts (read section 2 for more information).

12.8 “Free” loans of business assets

If you are a supplier of zero-rated goods such as tea, coffee, sandwiches etc. for use in a vending machine and you also provide your customer with the use of a vending machine (a supply of services), the VAT treatment is as follows:

Where you provide the machine to somebody who pays you the same price for the food and drink as those who are not lent a machine, you are not making a charge for using the machine and so no VAT is due on the loan of the machine.

If you provide the machine to somebody who pays you a higher amount for the food and drink than those who are not lent a machine, you are making a charge for using the machine and must account for VAT at the standard rate on the price difference.

13. Manufacturer’s consumer promotions

13.1 Promotions through a retailer

For example:

  • customers may buy from a retailer but send proof of purchase to the manufacturer to receive further reward goods from the manufacturer
  • the manufacturer may include a coupon inside the product, or as part of the packaging, which is redeemed by the customer for reward goods provided by the manufacturer

The reward goods are provided for no consideration and VAT must be accounted for as described in section 2.

Retailers may sometimes act as agent of the manufacturer in providing the reward goods to the customers who make qualifying purchases. In passing the reward goods to the retailer to distribute on their behalf, the manufacturer is supplying goods to the customer for no consideration. Again VAT must be accounted for as described in section 2.

13.2 Money-off coupons

If you as a manufacturer issue money-off coupons, you can reduce your taxable amount to reflect what is refunded provided that:

  • they are redeemable by the customer through the retailer with the amount stated on the coupon
    • at your expense
    • as part of a sales promotion where the coupon is to be accepted by the retailer in part payment for specific goods
  • you have sold the item to the retailer at the original price
  • the retailer receives the coupon from the customer and presents it to you to be paid the stated amount

This does not alter the amount shown on the invoice originally issued by you in your VAT records. The retailer’s position on receipt of the money is covered in paragraph 7.3.

13.3 Goods given as prizes for competitions

If you provide your products as prizes for competitions, for example in magazines, and you receive a benefit in exchange for this, then this is likely to be a barter transaction.

The VAT due on the supply of your product is the same as it would be on the normal selling price of the product if there had been no barter. If the prize provided is not something that you ordinarily make or sell, its value will be the actual cost incurred by you in providing the item. In barter transactions, the magazine publisher would also then be making a supply of services to you on which VAT should be charged.

If there is no exchange of benefits, there is no barter and VAT is due on a cost value subject to the normal business gift rules in section 2. You can read more about this in Notice 701/41.

13.4 Newspaper promotions

You may run a promotion with a newspaper for which vouchers are printed in the newspaper along with the promotion of your products. The public have to collect the vouchers in order to claim the reward.

The VAT position is as follows. If the:

  • reward is goods you should follow the business gift rules described in section 2
  • reward is services you should go to section 3
  • vouchers offer a discount they are coupons and the rules described in section 7 apply

14. Retail discount schemes

14.1 Store card discount schemes

Under these arrangements a customer who spends a minimum amount on any one purchase using a store card, has their account credited to a set amount. There is no reimbursement by the retailer to the credit card company who may, or may not, both be in the same VAT group.

If the retailer and credit card company are within the same VAT group, the group should only account for VAT on the discounted amount.

If the retailer and credit card company are not in the same VAT group, goods are sold by the retailer at their full value and VAT is to be accounted for on this amount

14.2 Deferred discount schemes

A customer may be entitled to a discount on the purchase price of goods. Normally the discount is not deducted from the customer’s payment but accumulated and paid out annually. This is usually treated as a discount and VAT is only due on the reduced amount. Until the discount is paid, the consideration for the goods supplied is the amount paid at the time by the customer and any VAT must be accounted for on this amount. The VAT account can then be adjusted when the discount is paid.

14.3 Lottery promotions

Customers are given free scratch cards which reveal the details of a prize. Often there is no need to buy anything.

The prize can be a free gift, a discount voucher for use against future purchases, or a gift voucher.

If the prizes are gifts, then these are supplies for no consideration and the rules described in section 2 apply.

If they are discount vouchers or coupons, these are normally evidence of entitlement to a discount and the rules described in section 7 apply.

If they are gift vouchers, the rules described in section 8 apply

14.4 Special in-store events

Sometimes store-card holders are invited to preview sales and are allowed special discounts. It is usually the case that no payment is made by the card operating company to retailers. Alternatively, other selected groups are offered discounts, again with no consideration being received from any other source. In both cases VAT is only due on the discounted amount.

14.5 ‘Pay your VAT’ promotions

These are promotions in which the retailer undertakes to reduce the price by an amount equivalent to the VAT. The net effect is normally to provide a discount with VAT then only due on the discounted, or net, amount charged.

14.6 Graded promotions

Graded discount vouchers offer a percentage reduction that increases with the value of the purchases made. Again VAT is due on the discounted amount.

14.7 Trade-in at minimum or pre-determined values

These are promotions which allow the customer either a minimum or a predetermined fixed value for goods taken in part exchange. In these circumstances the selling price of the goods is the full amount chargeable before any deductions for part exchange allowances. The purchase price of the goods taken in part exchange, provided the goods are eligible margin scheme goods, is the full amount allowed to the customer.

Where it is clear that there is no barter and the offer is purely for promotional purposes, for example £1 off paint if you bring in an old tin, the amount can be treated as a discount.

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Published 28 May 2012
Last updated 30 December 2019 + show all updates
  1. Guidance on gifts of goods and vouchers have been updated.

  2. First published.