Find out how to account for VAT schemes on business gifts, samples and promotional schemes.
This is a new notice. It replaces previous versions of Notice 700/7 ‘Business promotion schemes’ and includes the content from Notice 700/35, ‘Business gifts and samples’ which has been cancelled. Details of any changes to the previous versions can be found in paragraph 1.2 of this notice.
1.1 Information in this notice
This notice explains the VAT treatment of:
- business gifts
- different kinds of business promotion schemes
It is intended to help you ensure that the correct amount of VAT is accounted for and paid.
It does not cover:
- supplies of sponsorship which is covered in Notice 701/41: sponsorship
- business entertainment which is covered in Notice 700/65: business entertainment
- the detailed operation of retail schemes or bespoke retail schemes
1.2 Changes to this notice
The technical content has been updated to take account of developments in both law and policy.
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 your business and for which you were entitled to reclaim the VAT you were charged on its purchase as input tax.
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
- prizes dispensed from amusement goods in free lotteries - for further information see Notice 701/29: betting, gaming and lotteries
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 the gifts 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: the VAT Guide.
2.4 Gifts used for business purposes
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 but, 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 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 Promotion of sporting or entertainment activity
If your business consists of promoting a sporting, entertainment or similar activity no further tax is due 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.
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 all the following conditions are met:
- 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. But, if you donate prizes for competitions in newspapers or magazines you may have to account for VAT. For further information see Notice 701/41: sponsorship.
2.10 Gifts of road fuel and meals
Special rules apply if you give away road fuel for private motoring or catering in the form of free meals and drinks.
If you provide road fuel free, or below cost, for private motoring you are making a supply and VAT must be accounted for - see Notice 700/64: motoring expenses.
The provision of meals and drinks is covered in Notice 700: the VAT Guide under ‘Subsistence and staff entertainment expenses’. Further information is also available in Notice 700/65: business entertainment.
2.11 Sales of goods given to you as gifts
You may receive a gift of goods 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 - see Notice 701/1: charities.
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 sales persons
Many businesses involved in direct selling operate sales promotions or incentive schemes. These normally involve gifts or rewards to sales persons 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 sales person’s services - see also section 5.
There are several methods by which sales persons may be rewarded, for example:
- goods equal in value to a percentage of the total sales achieved may be chosen by the sales person free of charge, but they have to pay in full for any balance in excess of the reward
- an option is given to the sales person 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 sales person 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 but the essential characteristic is that the sales person 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 sales person themselves.
3. Gifts of services
If you provide a service to a customer free of charge there is usually no supply and so no VAT is due. But 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.
But, 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 - see Notice 700/65: business entertainment.
3.3 Provision of accommodation to employees
See Notice 709/3: hotels and holiday accommodation if you supply your employees with accommodation on your premises
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
An example of an item that would not qualify as a sample is 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. Another example is a product provided in quantities greater than necessary for its characteristics and qualities to be assessed. So, for example, if a waiter in a restaurant pours a small glass of wine as a taster it would qualify as a sample. But if the restaurant provided a regular customer with a bottle of wine, this would not meet the sample criteria.
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
Where payment for a supply of goods or services is totally in money this is known as monetary consideration. But 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.
5.4 Acts which we accept do not constitute non-monetary consideration
We accept that there are acts that are insignificant and should not be treated as non-monetary consideration. The following are examples:
- having to buy an item to get:
- another item free at the same time
- a discount voucher redeemable against a further purchase
- a lottery ticket
- something similar
- employees exceeding or topping periodic sales targets , or other such schemes, for which they receive a prize
- using an in-house credit card or store card
- entering a free prize draw
- entry to a competition, having to complete a slogan or give a recipe or similar
- a gift to an existing customer for their buying more than a certain amount of goods or services
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: the VAT Guide explains how to do this. But, 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. The main item may be either goods or services and you sell them both at a single price as part of a promotion. An example would be an empty plastic storage jar attached to a box of cereals.
The price paid should normally be apportioned where the items, as in this example, are liable to VAT at different rates. But, you may, as a concession, account for VAT on the minor article at the same rate as the main article, where the minor article meets all the following conditions so that it:
- 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
No apportionment is necessary.
If your supply meets the above conditions the articles do not need to be detailed separately on your invoice. Notice 701/10: zero-rating of books and other forms of printed matter gives more guidance on goods linked with printed matter.
In all other circumstances where you have to issue a VAT invoice the minor article must be shown. For further information on invoicing see Notice 700: the VAT Guide and Notice 700/21: keeping VAT records.
6.3 Multisave promotions subsidised by a manufacturer
Manufacturers sometimes make payments towards the costs of promotions such as buy three items for the price of two. 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 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. For more information see Notice 727: retail schemes.
On the other hand, the manufacturer may pay you for providing a service to them, for example to advertise the promotion or the products. Again you must account for VAT at the standard rate. This, in turn, is the manufacturer’s input tax subject to the normal rules.
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, 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 provided the goods are sold at their normal price.
But, if you sell money-off coupons, discount coupons or discount cards, which entitle the holder to discounts from either you or other businesses, then this is a standard-rated supply and you are required to account for VAT.
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. Therefore a VAT invoice must not be issued to anyone other than the customer.
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.
But, 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
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. They are normally supplied for a consideration. They also provide a right to receive goods or services to their face value without requiring additional payment, although further payment may be made.
- gift vouchers
- phone cards
- book tokens
- electronic top-up cards
They can be issued in either physical or electronic form.
8.2 Issue of a face-value voucher
The issue of a face value voucher is a supply of services for VAT purposes. 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.
8.3 Types of face value voucher
Face value vouchers are separately defined as:
- 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 8.14.
8.4 Credit vouchers
Credit vouchers are face value vouchers that are issued by a person who cannot themselves redeem them for goods or services. Instead the issuer undertakes to give complete, or partial, reimbursement to whoever does redeem the voucher. They 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. The redeemer of the voucher accounts for VAT at the time the voucher is redeemed for goods or services. But, to qualify for this treatment, the redeemer must account for VAT 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. Then, provided 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 Statement of practice about credit vouchers
The legislation allows us 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. But 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. 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 8.8.
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.
8.7 Statement of practice about retailer vouchers
The legislation allows us to collect VAT from the issuer who first sold a retailer voucher if the redeemer fails to account for any VAT due. But 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.
8.8 Other kinds of voucher
Face value vouchers that are not defined as either credit vouchers or retailer vouchers are classified as ‘other kinds of voucher’. All other kinds of voucher 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.
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.
8.9 Invoicing and adjustments
Issuers of face value vouchers, other than credit 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.
In the case of retailer vouchers, if you are the issuer who redeems the voucher you do not need to account for VAT until the voucher is redeemed. Consequently it is suggested 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 of face value vouchers, other than credit vouchers, must account for VAT on the sale of the vouchers at the time the vouchers are sold. In that case you will need to issue a full VAT invoice to any further intermediate supplier in the supply chain. They, in turn, will be entitled to reclaim input tax on the purchase of the vouchers subject to the normal rules. The evidence for this will be the VAT invoice they receive from you.
A subsequent adjustment 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:
- 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 the need to make later adjustments.
Information regarding any split in liability can only be provided by the person who redeems the voucher. In order to avoid the need to track individual vouchers, 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 to intermediate suppliers they should include the percentage split on any VAT invoice they issue to an intermediate supplier. This split should be quoted on any further VAT invoices issued by intermediate suppliers in the supply chain.
8.10 Place of supply
The normal place of supply rules apply to vouchers. For more on this see Notice 741A: place of supply of services.
8.11 Face Value Voucher and retail schemes
Some intermediate suppliers may include sales of face value vouchers in their retail schemes depending on the type of retail scheme they use.
|the Point of Sale scheme,||include sales of vouchers in their daily gross takings at the appropriate rate of VAT.|
|an Apportionment scheme,||account for output tax on the sale of vouchers outside the retail scheme.|
|a Direct Calculation scheme,||check the position in [Notice 727/5: retail schemes: how to work the Direct Calculation schemes](https://www.gov.uk/government/publications/vat-notice-7275-retail-schemes-how-to-work-the-direct-calculations-schemes] as the position depends on the minority goods they mark up.|
|a bespoke scheme,||contact us to agree a fair and reasonable method of accounting for vouchers.|
8.12 Face value vouchers as part of a package
Examples of a face value voucher provided as part of a package include:
- a hotel issuing what they claim to be a face value voucher when a customer settles their bill - but the customer does not have the option of a price reduction in lieu of the voucher
- a retailer giving customers a face value voucher on purchases over a certain amount - but, 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 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.
8.13 Face value vouchers given away for no consideration
Where face value vouchers are purchased by businesses to give away for no consideration, for example as part of a promotions scheme, the VAT incurred may be recovered as input tax subject to the normal rules. But, VAT also has to be accounted for on vouchers given away for no consideration to the extent of the input tax claimed.
A decision of the Court of Justice of the European Union applies to face value vouchers given by employers to employees in lieu of wages. As a result we see this as relating to supplies made by the business. For salary sacrifice agreements entered into on, or before, 28 July 2011(and which extend beyond 31 December 2011), VAT must be accounted for in accordance with the guidance in Revenue and Customs Briefs 28/11 and 36/11. From 1 January 2012 VAT must be accounted for on amounts of salary foregone in return for taxable benefits.
If you give retailer vouchers away free to a customer who redeems them with you without making a further payment, VAT may be due on redemption subject to the business gift rules. For vouchers redeemed for goods see section 2 and for those redeemed for services see section 3.
8.14 Postage stamps
Valid United Kingdom and Isle of Man postage stamps, purchased in the United Kingdom and Isle of Man, are payment for postal services that 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. But 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 VAT when sold in the UK and Isle of Man. For full details see Notice 701/8, ‘Postage Stamps and Philatelic Supplies.
8.15 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. But 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. Cash backs
9.1 Definition of cash back
The term ‘cash back’ 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 cash backs 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 cash back, it reduces the taxable value of your purchase and so you must reduce your input tax accordingly. Any cash back payment from manufacturer to customer, that does not affect the wholesaler, does not require the wholesaler to make any VAT adjustment.
9.2 Cross border cash backs
Where cash backs are paid between businesses in different EU member states, no VAT adjustments should be made. This means that:
- where a UK manufacturer pays a cash back to a recipient in another EU member state, the manufacturer cannot reduce their output tax
- where a UK recipient receives a cash back from a manufacturer in another EU member state, no input tax reduction is required by the recipient
9.3 Cash backs 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 cash back relates to goods that were supplied VAT-free to the person receiving the cash back, 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 cash back to the charity.
9.4 Cash backs provided by an intermediary for telecommunications services
This can occur when an intermediary arranges for a customer to be signed up with a telecommunications provider and, as an incentive, the intermediary provides line rental reimbursement to the customer after a period of time. The customer produces bills as evidence and the intermediary provides a cash back.
As the intermediary is not providing the phone service, the cash back 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 to the intermediary.
10. Loyalty schemes
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, but also by manufacturers and other suppliers to encourage continued customer loyalty.
10.2 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 cash paid by the collector
10.3 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. But, 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 contact our advice service or your usual HMRC point of contact for advice.
10.4 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.
10.5 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, and so on, 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.
10.6 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 your making free supplies of goods or services. They are liable to VAT as explained in section 2 for goods and section 3 for services.
10.7 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.
10.8 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 10.1.
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.
10.9 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.
11. Manufacturer’s trade promotions
11.1 Vouchers and trade reward schemes
Manufacturers often run promotions to encourage greater purchases of their premium goods.
- 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
11.2 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.
But, we will accept that these rewards may be treated as part of a combined, or multiple supply if the following conditions are all met:
- the rewards are of a kind to be used in the recipient’s business
- the rewards are not intended for the personal use of the person receiving them
- the rewards 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, but the premium supplies may, for example, have been obtained through a wholesaler. For example:
- the manufacturer supplies the reward direct to the customer
- the wholesaler supplies the reward on behalf of the manufacturer from their own stock and the manufacturer either reimburses the wholesaler or replaces the stock
- the wholesaler supplies the reward from stock provided for this purpose by the manufacturer
11.3 Non-business use of reward goods
A VAT registered customer, who is entitled to input tax deduction, 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 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.
11.4 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.
11.5 Vouchers or loyalty points swapped for face value vouchers
If your vouchers or loyalty points are collected and swapped for face value 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 you have given your vouchers in exchange for your loyalty points and 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
11.6 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: the VAT Guide explains more about credit notes.
But, if instead you supply the customer with goods to the value of the discount earned, the discount has been used to pay for the additional goods supplied. To avoid accounting for further VAT, you would normally have to issue credit notes with VAT to reflect the reduced value of the qualifying supplies and invoice for the reward goods showing an equal amount of VAT. But, if all the goods are liable to VAT at the same rate, the amounts originally invoiced are the full amounts on which VAT is due.
You may issue a ‘no-charge’ invoice without VAT for the additional goods which will achieve the same result 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
11.7 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 - see section 2.
11.8 Free loans of business assets
If you are a supplier of tea, coffee, water and the like for drink vending machines and provide your customers with the free use of machines, the VAT treatment is as follows:
|Where you provide the machine to somebody who||then|
|pays the same price as those who simply buy the product,||you are not making a charge for using the machine and so no VAT is due on the loan of the machine.|
|is charged a higher amount than those who simply buy the product,||you are making a charge for using the machine and must account for VAT at the standard rate on the price difference, even if the goods themselves are zero-rated for VAT.|
This principle may be applied elsewhere where there is no obligation on the recipient to make any payment in money, or in kind, as payment for the loan of the asset.
12. Manufacturer’s consumer promotions
12.1 Promotions through a retailer
- 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.
12.2 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
But, 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.
12.3 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. But, 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. There is more about this in Notice 701/41: sponsorship.
12.4 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
13. Retail discount schemes
13.1 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.
|the retailer and credit card company are within the same VAT group,||the group should only account for VAT on the discounted amount.|
|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.|
13.2 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 amount involved remains consideration for the goods supplied and VAT must be accounted for on the full amount at the time the supply was made. The VAT account can then be adjusted when the discount is paid.
13.3 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 of||then|
|gifts,||these are supplies for no consideration and the rules described in section 2 apply.|
|discount vouchers or coupons,||these are normally evidence of entitlement to a discount and the rules described in section 7 apply.|
|gift vouchers,||the rules described in section 8 apply.|
13.4 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.
13.5 ‘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.
13.6 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.
13.7 Trade-in at minimum or pre-determined values
These are promotions which allow the customer either a minimum or a pre-determined 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 promotion 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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