Charging VAT on discounts and free gifts

Charging VAT on discounts and free gifts

When VAT registered traders issue an invoice to a customer, they must seek to ensure that the correct rate of VAT is charged. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that need to be observed.  In the UK, there are three separate VAT rates, the standard rate @ 20%, the reduced rate @ 5% and the zero rate @ 0%.

Also, there are special rules to be aware concerning VAT to charge when there are discounts or free gifts. The rules are complex, but we have summarised the main aspects below.

Discounts and free gifts

Offer   How to charge VAT
Discounts      Charged on the discounted price (not the full price)
Gifts   Charged on the gift’s full value. There are some specific exceptions on gifts given to the same person if their total value in a 12-month period is less than £50.
Multi-buys   Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
‘Face value’ vouchers that can be used for more than one type of good or service ‘Face value’ vouchers that can be used for more than one type of good or service No VAT due, if sold at or below their monetary value
Redeemed face value vouchers Charged on the full value of the transaction
Redeemed face value vouchers sold at a discount Charged on the discounted value of the transaction
Link-save offers (buy one get one free or discounted) VAT is apportioned as mixed-rate goods – there are exceptions
Source: HM Revenue & Customs Wed, 12 May 2021 00:00:00 +0100

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