The UK is making these changes because EU Member States are required to implement the EU Vouchers Directive (Council Directive 2016/1065), into domestic law by 1st January 2019. These changes will impact all vouchers issued on or after 1st January 2019. Any vouchers issued prior to this date will be dealt with under the existing rules.
Why is the law being changed?
The amendments should simplify the VAT rules for transactions involving vouchers and in particular harmonise the various VAT treatments applied throughout the EU. This should remove the existing risks of non or double-taxation of the related goods or services due to inconsistent approaches applied by different Member States.
The aim of the rule changes is to bring clarity to the questions of when VAT is due and the consideration upon which that VAT must be calculated from. It will achieve these objectives by giving clarity to whether a voucher is for a single or multiple purpose and, once this is confirmed, rules on how to account for VAT on each type of voucher. The new legislation is not making changes to the place of supply rules or the scope of VAT.
The new rules will apply to vouchers for which a payment has been made and which will be used to buy something. This will include items such as prepaid gift cards and phone cards. Postage stamps, discount vouchers, transport tickets and admission tickets to cinemas etc. are not impacted.
Single Purpose Vouchers (SPVs)
The new rules widen the scope of the definition of an SPV. Generally, the revised definition provides that a voucher is an SPV if the following two points are known at the time the voucher is issued:
- the place of supply of the goods or services to which the voucher relates; and
- the voucher can only be used to purchase goods or services at a single rate of VAT
Even if a voucher can be used for different goods or services, provided the supplies are subject to the same single VAT rate it can be categorised as an SPV. The chargeable event (the tax point) will be deemed to occur on the supply of the SPV. As a result, some businesses may have to account for VAT at an earlier date than under the current rules. Moreover, the VAT will still be due if the voucher remains unredeemed.
Multi-purpose vouchers (MPVs)
Vouchers that do not satisfy the criteria for SPVs as outlined above, are classified as MPVs. The chargeable event for supplies of these will be deemed to take place at the point of redemption, that is, at the time of supply of the goods or services that the voucher is used to obtain.
At present, VAT is due on the price for which an MPV voucher is sold. The new law provides that consideration for issue and subsequent transfers of an MPV will be disregarded and hence any related input VAT may not be deducted. Rather, once an MPV is redeemed, VAT must be accounted for on the price paid by the last purchaser of the voucher. If this is unknown, then the VAT is due on the face value of the voucher. A possible consequence therefore is that an issuer of an MPV may have to account for VAT on a higher price than under the current rules as they are based on the amount received by the issuer.
One important point to note from these changes to the rules is that the sale of an MPV by an intermediary acting in his own name will no longer be treated as a transaction for VAT purposes. Therefore, businesses involved with distributing such products might wish to consider how they structure arrangements as keeping a buy sell arrangement may negatively impact their VAT position.
Businesses involved with the issuance, use or redemption of vouchers need to review these new rules in order to understand how they will be impacted by them. This is because businesses may find that the time scales for accounting for VAT may change (which could negatively impact their cash flow) or involvement in the use of MPVs may carry the risk of restricted input VAT recovery. They may also have to account for more VAT as it will be due on vouchers that are unredeemed.
Finally, with the rules set to change in every EU Member State, those businesses trading cross border in the EU should review both the new rules and take the opportunity to ensure that VAT is being accounted for in the right country and at the correct rate. The use of vouchers is likely to be an area looked at closely by tax authorities as the new rules begin to apply and hence sense checking how VAT is accounted for would be a prudent step to take.
If you believe you may be affected by the above developments, please do get in touch, to discuss how we can help you.