You have joined forces with local firms to promote your businesses by issuing discount cards. Some of the cards are free, others cost. Your question is when and how is VAT accounted for on the card?
Vouchers, coupons, tokens and cards
The terminology used by HMRC to describe discount offers can be confusing as it often doesn’t match the general descriptions used by businesses and the public at large. Here’s an explanation in plain English.
Tip. The key to understanding the VAT rules for discount coupons, cards, vouchers, etc. is not to worry about the terminology. Instead, consider exactly what it is that the coupon etc. achieves as that determines the VAT treatment.
Example. If you were to issue a discount card free of charge for use by your customers and those of other businesses, no VAT arises on the issue of the card etc. Instead, when a customer makes a purchase the retailer simply applies the discount and charges VAT on the discounted price at the rate applicable to the goods or services sold.
Tip. If you use a retail VAT scheme in your business, HMRC guides tell you how to program your tills to achieve the correct outcome (see The next step ).
Money (off) at a cost
Your situation may be trickier as the discount cards to be issued by yours and the other businesses in the scheme won’t be free. The terms of the discount cards will be:
- a £30 card fee for a 20% discount at our subscriber’s attraction and purchases made from all other businesses, mainly shops and cafés, in the scheme
- £200 for the “Gold Card” which gives the purchaser the right to unlimited usage. Note that HMRC has confirmed that the fees are normally zero-rated.
VAT for discount card fee
When deciding the VAT position for the discount cards our subscriber needs to keep in mind our first tip and look at what the card does.
20% discount card. This offers a discount on both your fees and purchases from other businesses. The VAT rules say that if you charge a fee for a discount card etc. that can be used against purchases from other businesses it must be standard-rated. This means the £30 must include VAT, i.e. £25 for the card plus VAT at 20% (£5).
Note. If the card can only be used for purchases from the issuing business, the VAT treatment of the fee follows that of the goods or services bought using the discount. So, if the card can only be used against fees on your services, he could zero-rate the card fee. Conversely, if the card can be used only by the issuing business but for both standard and zero-rated supplies, the fee for the card would be standard-rated.
Gold Card. The card is not a discount card at all. It is actually a pre-payment card, the equivalent of a ‘season’ ticket. As the “ticket” is for zero-rated services so the £200 fee is zero-rated.
In all situations where a discount card, voucher etc., is given for no cost there is no VAT to account for at the time it’s issued. If a fee is charged for the discount card the VAT treatment depends on where the card can be used to obtain a discount. If it can only be used against zero-rated purchases from the issuing business, the card fee can be zero-rated too. In all other cases standard-rate VAT applies to the card fee.
The next step
HMRC’s guidance on discount cards etc
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.