Gift vouchers, deposits and no-show fees

What counts as a voucher

VAT Notice 700/7, section 9, covers vouchers issued from 1 January 2019. A voucher for VAT purposes is an instrument that must be accepted as payment for goods or services, where the goods, the services or the business accepting it are stated on the voucher or its terms, and which can be passed on as a gift. A gift card for your restaurant, a printed gift voucher and an online voucher for a hotel stay all qualify.

Discount vouchers and money-off coupons are not vouchers under section 9. A "20% off your next visit" card is a discount, and VAT is charged on the reduced price the customer pays.

Every voucher is either single-purpose or multi-purpose, and the type decides when the VAT is due.

Single-purpose vouchers

A single-purpose voucher is one where, at the time it is issued, the VAT rate of what it buys and the place of supply are both known. Afternoon tea for two eaten in the café, a three-course dinner in the restaurant, or one night's bed and breakfast at the hotel are single-purpose: each is a UK supply at the standard rate.

VAT is due when you sell the voucher, in the VAT period of the sale. No more VAT is due when the customer uses it, because it has already been paid. If the voucher is never used, or used for less than its value, no VAT adjustment is allowed unless you make a refund.

Multi-purpose vouchers

A multi-purpose voucher is any voucher that is not single-purpose. A "£50 to spend" gift card in a café that sells eat-in meals at 20% and cold takeaway food at 0% is multi-purpose, because the rate that will apply is not known at the time of sale. HMRC's notice says a voucher is not single-purpose if one of its uses could carry a different rate.

No VAT is due when a multi-purpose voucher is sold. VAT is due when the voucher is used and the food, drink or room is supplied, at the rate for what the customer buys. The value is the voucher's face value, or the amount paid for it at its last sale where you know that amount. If the voucher is never used, there is no VAT to account for.

A £60 voucher sold by a café

Single-purpose voucher for afternoon tea for two

VAT is due when the voucher is sold. Nothing more is due when it is used, or if it is never used.

£10.00

Multi-purpose voucher for £60 of anything

No VAT when sold. Used for a £36 lunch eaten in and £24 of cold takeaway sandwiches, VAT on redemption is:

£6.00

Vouchers sold through a third-party gift site at a discount follow the same rule. HMRC's example is a £100 voucher sold for £90: the business accepting it accounts for VAT on £100 unless it knows the voucher was last sold for £90.

Recording vouchers in the books

Money taken for a voucher is not a sale until the voucher is used. Until then it is owed to the holder in food, drink or rooms, so it sits on the balance sheet as a liability. Recording voucher sales as takings overstates sales in December and understates them in the months the vouchers come back.

A voucher in the books from sale to redemption

1. SoldCash in the bank; the same amount goes to a voucher liability account. A single-purpose voucher also has its VAT posted now.
2. HeldThe voucher stays a liability on the balance sheet. It is not sales.
3. UsedThe liability is cleared and the amount becomes sales of food, drink or rooms. A multi-purpose voucher has its VAT posted now, at the rate of what was bought.
4. ExpiredAny balance left is released from the liability as income. A multi-purpose voucher carries no VAT on that balance.

Keep a voucher register: each voucher's number, the date sold, the price paid, whether it is single-purpose or multi-purpose, the expiry date, and the date and amount used. Check the register against the liability account at each month end and at each VAT return.

The year end needs the same care. Take a restaurant with a 31 March year end that sells £8,000 of multi-purpose gift vouchers in December, of which £3,000 have been used by 31 March. The £3,000 is in sales for the year, with its VAT on the returns for the periods in which the vouchers were used. The other £5,000 sits on the balance sheet at 31 March as money owed to voucher holders, and comes into sales in the following year as the vouchers are used or expire.

Vouchers sold through a third-party gift site are recorded at what the customer paid, with the site's commission as a cost. The site's statement shows each voucher's number, so the register can match the redemptions to the payments received.

Deposits

VAT Notice 700 says VAT is due on all charges, deposits and fees which are full or part payments for a supply. Most deposits are advance payments, so they create a tax point when you receive them, and the VAT goes on the return for the period in which the money arrives. The rest of the VAT falls on the day of the meal or the stay.

If a customer does not take up the booking and you keep the deposit, the VAT you accounted for stays due. HMRC says the payment "cannot be reclassified if the supply is unfulfilled". VAT Notice 709/3 says the same for hotels. If you refund the deposit, you reclaim the VAT on your next return.

A £20 a head deposit for a table of ten

• Deposit of £200 received: VAT in the period it arrives£33.33
• Bill on the night £650, less the deposit: £450 paid, VAT£75.00
• VAT on the whole meal£108.33
• If the party does not come and you keep the £200, VAT still due£33.33
• If you refund the £200, VAT reclaimed on the next return£33.33

Full prepayments work the same way. A Christmas party booking paid in full in November, for a meal in December, has its tax point when the money arrives. If your VAT quarter ends on 30 November, the VAT on that payment is due with the November return, a month before the meal is served. Cash forecasts should hold the VAT on prepaid bookings aside from the day they are paid.

Some deposits are not payment for anything. A refundable security deposit, such as one taken against damage to hired equipment, does not create a tax point and carries no VAT while you hold it.

No-show and cancellation fees

Under Revenue and Customs Brief 2 (2022), which every business had to follow from 1 April 2022, fees charged when a customer ends a contract early are treated as further payment for the supply that was agreed, so "most early termination fees and some cancellation fees" carry VAT where the supply does, even if they are described as compensation. HMRC's manual, at VATSC05825, says retained deposits and no-show charges at hotels are subject to VAT and cannot later be recast as compensation.

We read that guidance as applying to a restaurant's no-show fee charged to a card under the booking terms, and account for VAT on it at 20%. A £25 a head fee for a table of four is £100, of which £16.67 is VAT. HMRC has published no guidance specific to restaurant no-show fees that we have found.

Write the terms down. The booking confirmation should state the deposit or fee, when it is kept, and when it is refunded, so the till and the VAT return follow the same rule.

Hotels and rooms

VAT Notice 700 says a booking fee paid to secure a hotel room is payment for making the booking, and that does not change if the guest does not take up the room. A deposit kept from a guest who cancels late carries the same VAT it did when it was paid: £15.00 on a £90 deposit. For stays of more than 28 days, see VAT on long hotel stays and deposits.

Records and deadlines

• Single-purpose vouchers: VAT on the return for the period the voucher is sold.
• Multi-purpose vouchers: VAT on the return for the period the voucher is used.
• Deposits: VAT on the return for the period the money is received.
• Refunds of deposits: VAT reclaimed on the next return after the refund.
• VAT returns and payment: one calendar month and 7 days after each period ends.
• VAT records, including the voucher register and booking terms: kept for at least 6 years.

Common mistakes

• Putting voucher sales straight into takings, then counting the same money again as sales when the voucher is used.
• Charging VAT on a multi-purpose voucher when it is sold, then again on the meal.
• Treating every voucher as multi-purpose, which delays VAT that is due at the point of sale.
• Removing the VAT from a deposit when the customer does not turn up.
• Treating a no-show fee as outside the scope of VAT because the booking terms call it compensation.
• Leaving expired voucher balances on the balance sheet for years.

How we help

We set up voucher and deposit codes in your till, booking system and Xero, keep the voucher liability reconciled each month, and check the VAT on vouchers, deposits and no-show fees before each return. See accounts and VAT for hospitality.