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This guide explains how to charge VAT on a variety of business promotions such as discounts and other special offers.
There are particular rules for accounting for VAT on promotions such as multi-buy offers eg, buy-one-get-one-free (BOGOF), coupons, vouchers and manufacturers' support of retail promotions. If any of your goods or services are discounted, you must charge VAT on the discounted price rather than the full price. If you give away products, you must usually account for, and pay VAT on, the full value or cost of the gift, although there are some exceptions.
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If any of your goods or services are discounted, you charge VAT on the discounted price rather than the full price.
If you make an offer to a customer such as 'we will pay your VAT', VAT is actually payable to HM Revenue & Customs (HMRC) on the amount the customer would have paid on the discounted price, not the amount they have paid at the full price.
If you give away products, you must usually account for, and pay VAT on, the full value or cost of the gift, although there are some exceptions.
Some businesses operate multi-buy offers such as buy one get one free (BOGOF) or three-for-two. If all of the items have the same VAT rate, you charge VAT on the combined price. If the items have different rates of VAT, the VAT is usually apportioned as 'mixed rate goods'.
There are also link save offers where, if the customer buys one product, they can get a different product free or at a discounted price. The different product may be attached to the main product, or sold or given away separately. An example might be a free comb attached to bottle of shampoo. If the link save products have different VAT rates, the VAT generally must be apportioned as mixed rate goods. However the VAT on the minor item may be accounted for at the same rate as the main product if the incentive product:
Payments made by manufacturers or suppliers to retailers to support promotions are treated as discounts and the manufacturer or supplier's VAT can be reduced accordingly.
For the retailer, the amount of the support payment is considered as additional income as if that income were from the retailer's customer. If the retailer is using a retail VAT accounting scheme, the amount received must be included in their takings figures.
Where a manufacturer or supplier pays a retailer for a specific promotion, the promotion is deemed to be a service supplied by the retailer. The retailer must charge the manufacturer VAT on the cost of the promotion, and the manufacturer can reclaim this VAT on their next VAT return. An example might be a manufacturer paying a retailer to display their goods in the shop window.
Money-off coupons, vouchers or similar, offer customers a discount off a future purchase. If you give them free at the time of a purchase, no VAT is due, but if you sell them for a discount, VAT is due on the price charged.
When your customers redeem money-off coupons, VAT is due only on the additional amount, if any, that the customers pay you.
Face value vouchers have a monetary face value. These are used instead of money for a future purchase. If you sell them at or below their monetary value, no VAT is due.
When a customer redeems a face value voucher, the transaction is treated as though the face value voucher was cash, and VAT is due on the full value of the transaction. If you can show the voucher had been sold at a discounted amount, VAT is due on the discounted value, rather than the face value of the voucher.
If you give away face value vouchers and redeem them for no further payment, the goods purchased are usually treated as if they were free gifts for VAT purposes.
With trade order incentive schemes where the manufacturer gives their retailers a reward for a minimum amount or volume of order. This reward is usually treated as a free gift for VAT purposes.
If a manufacturer agrees - either directly or via a retailer - to give a member of the public a free item or coupon in exchange for proof of purchase of one of their products from a retailer, the free item or coupon is usually treated as a free gift for VAT purposes.
If a manufacturer issues a money-off coupon or gives cashback to a member of the public, the taxable amount (eg the reduction in VAT due) of the original sale to the retailer can be reduced when the coupon is redeemed or the cash returned.