You may have noticed a few tweets over the last week about the Lebara case and changes to UK VAT rules on vouchers. This is one of the most complex areas of VAT; and so in an attempt to maintain my reputation for making the complex simple, here’s a quick and easy take on Lebara and vouchers...
The way things were
The UK has in general taxed vouchers on redemption. So as an example if you went to HMV and bought a gift voucher for a friend, they wouldn’t account for VAT at the time you paid the cash, but would do so when your friend came back to the store and used the voucher to buy stuff. This gave retailers one big VAT advantage, if your friend lost the voucher and never used it, HMV would get its £10 VAT free – this concept is called “breakage”.
But difficulties arose when a voucher was sold through a distributor (which is fairly common practice). UK rules say that the sale of a voucher by a middle-man is subject to VAT (unlike a sale by the retailer itself) in order to ensure that any margin made is appropriately taxed. As a result in a three party chain the distributor accounts for VAT on its sale, the retailer accounts for VAT when the voucher is used, and the poor customer ends up paying VAT twice on the same thing!
And so HMRC came up with an odd work around to stop this happening. This allowed the distributor in such a chain to recover VAT on its purchase of a voucher from a retailer, even though VAT would not actually be accounted for by the retailer on the sale (as we know from the HMV example above). This “pseudo-VAT” was therefore netted against the VAT charged by the distributor, and ultimately the customer only paid VAT once (accounted for by the retailer when the voucher was ultimately used). Right overall result but all a bit of a mess.
The new way
In its recent ECJ case Lebara challenged the UK rules. VAT is a harmonised tax across the EU, and so while the UK has its own VAT legislation that legislation must fall within the parameters set by the EU VAT Directive. I won’t go into the details of the case, but essentially Lebara had ended up in the position outlined above of being taxed twice; this was because its distributor was not based in the UK and therefore could not make use of HMRC’s special work around to recover “pseudo VAT”.
And last week Lebara won, and the UK has had to change its rules. The result is that the sale of a voucher should now be treated as a sale of the actual goods or services which that voucher can be used to buy. So back to the HMV example: HMV should now account for VAT when you pay for its gift voucher, any distributor should do the same, and no VAT should be accounted for when your friend ultimately uses the voucher.
I’ll put in a small caveat here. Lebara only considered vouchers with a single purpose i.e. ones that can only be used to buy one type of thing and at one VAT rate. It’s obviously hard to tax a voucher based on what it can be used to buy if you don’t know what those things will be. So the changes only apply to single purpose vouchers.
What are the implications?
Well the obvious big one is no more “breakage”, vouchers will be taxed even if they’re not used. Judging by some of the messenging coming from the Treasury they feel that this is an anti-avoidance measure and will be a big winner for the Exchequer. I think this may be a little premature. Firstly it’s not obvious to me that breakage was tax avoidance in any event, after all, if a customer doesn’t actually buy anything why should VAT be charged? Secondly, as the rules for multi-purpose vouchers haven’t changed there’s an obvious solution to keep breakage, make sure your voucher can be used to buy more than one type of thing...
Another interesting impact here is how and where a voucher will be taxed. As the new rules apply VAT based on the underlying good or service, different vouchers will have different VAT treatments depending on what that good or service is. And a sure consequence of numerous different treatments is numerous types of VAT planning around them. Factor in cross border sales, special rules for different types of services, and the EU proposals for further changes to the voucher rules in 2015, and this becomes a complex and challenging area for businesses to get right!
