VAT-efficient Promotions

These days everyone is more price-conscious. Sales promotion schemes are a good way of enticing new business or keeping hold of existing customers. How can you make these schemes VAT efficient?

Simple discounts

If you sell a product at a reduced amount, the VAT payable on the sale is based on the discounted sale price. That seems straightforward, but what if you offer a discount on future purchases. Is the promise of future money off a supply for VAT in itself?

“Money-off” vouchers

If you offer a discount voucher to customers, against, say, future purchases made within a limited period of time, e.g. “spend £100 with us in the next month and receive a 10% discount”, will the VAT payable be based on £90 or £100?

As the discount only affects future purchases, output VAT is only due on the amount your customer pays for those purchases, i.e. in the above example £90. Also, there is no VAT payable at the time the voucher is issued by the retailer because no money is paid for it.

Tip. Giving your customers money off future purchases encourages repeat orders and VAT is only payable on the discounted amount you receive.

Selling discount cards

Instead of giving away a discount voucher you could offer customers a longer term loyalty card that gives them money off future purchases or additional benefits, e.g. free entrance to a theme park. If you charge a fee for the card, the amount paid by the customer will, in most cases, be subject to standard rate VAT, but not if all of the goods or services bought, or benefits offered, with the card are entirely zero-rated.

Example. Cheaptrav Ltd sells an annual discount card to Jim for £50. This gives Jim 50% off all bus travel with the company for the period covered by the card. The £50 paid by Jim is zero-rated because it only relates to bus travel (which is always zero-rated).

Tax case precedent

A couple of years ago, the court decided that Leisure Pass Group Ltd got the VAT treatment of a promotion scheme wrong. But what were the VAT consequences you need to know about?

The company sold passes to the public, enabling them to visit 55 different venues free of charge in London. The range of attractions included historic houses, museums and galleries. The admission to some of these venues was exempt from VAT whilst for others it was standard-rated. The company argued that 60% of the money received from the sales of the passes should be exempt from VAT because the admission to 60% of the attractions was also exempt from VAT. That sounds fair.

The courts ruled that the pass was a right of entrance to a number of venues as chosen by the holder of the pass. This represented a supply of services in its own right and the Taxman was entitled to standard rate VAT on the full price of each pass sold.

Tip. If you sell discount cards to your customers, you can zero-rate what you charge for them provided that all the products or services, to which the discount could apply, are also zero-rated.

If you need any help or advice on VAT, dont hesitate to get in touch to organise a free initial meeting 0191 386 4786

VAT-efficient Promotions

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