The global health pandemic has left countless businesses facing major cash flow problems, especially those operating in the leisure and hospitality sectors. For some, vouchers may offer a short-term solution to restart cash flow, but what are the VAT issues to watch out for?
Vouchers can take various forms, such as single- and multi-purpose. Their VAT consequences also vary depending on the type of voucher supplied, the value of consideration received in exchange for the voucher and the timing of the supply itself (either sale or redemption).
In the current circumstances, businesses may find themselves selling vouchers to their customers at a price much lower than their face value. For example, a restaurant may sell a voucher for £50 which allows the customer to enjoy a sit-down meal worth £100 once lockdown restrictions ease and the restaurant reopens. Practically, this idea works in favour of both parties by generating cash quickly for the restaurant and allowing the customer to eventually receive a meal worth considerably more than they paid.
Whilst the idea is simple, it is less easy to calculate the VAT due to HMRC where vouchers are sold for less than their face value.
Firstly, it is important to determine the type of voucher being supplied. A ‘single purpose voucher’ is one that can be redeemed by a customer on a supply whose VAT treatment is known at the time of issue of the voucher, for example a voucher that can only be redeemed on a restaurant-served meal which is subject to VAT at 20%. Output VAT is normally due to HMRC at the time of issue, based on the consideration physically received from the customer. In our previous example, we would expect the restaurant to account for VAT on the £50 consideration received from the customer.
Here, record keeping is crucial - the business must be able to show HMRC that it has accounted for VAT on the consideration received of £50. Poor record keeping could leave the business liable to account for VAT on the full value of the voucher, being £100.
Businesses may also issue ‘multi-purpose’ vouchers which can be used for various types of supplies with differing VAT treatments. For example, this applies to a retail outlet that allows its vouchers to be redeemed on a VATable restaurant meal or on cold takeaway food which is zero-rated for VAT. Here, output VAT is due to HMRC only when the voucher is redeemed by the customer, not when the voucher is initially issued, or payment received. VAT is based on the most recent purchase price of the voucher, which is not necessarily the face value, or if this figure is unknown, it is based on the full face value of the voucher.
Multi-purpose vouchers therefore have the added benefit of delaying the date on which VAT is payable to HMRC. But given that output VAT is calculated based on the most recent purchase price, it is vital that the business holds accurate VAT records to support the basis of the output VAT calculation. If accurate records are not held, HMRC could expect the business to calculate output VAT based on the full face value of the voucher, rather than on the most recent purchase price.
A carefully managed voucher scheme may provide important short-term cash flow benefits during the current economic crisis, but make sure your business records are up to the task of protecting your VAT savings.