Feature: VAT on Vouchers - A European Debate

The UK legalisation for VAT on vouchers was re-written in April 2003 and at the time had major implications throughout the incentive and marketing industry, as well as for voucher providers and issuers. A number of concerns were raised by businesses after the legislation was passed. One of the main issues cited was the ambiguity over how VAT would be charged on vouchers.

Confusion over these charges has been so rife that The European Commission has decided to review the legislative position on vouchers across the EU. It recently launched a consultation programme, inviting comments from businesses, which issue or deal in vouchers, and others with an interest in the sector. The aim of the consultation is to identify problems and examples of legislative divergence between EU member states. The ultimate aim is to harmonise the treatment of VAT on vouchers across all EU member states and implement legislation which is sufficiently flexible to cope with future developments in the sector.

So, what are the current issues and what will this mean for incentive and motivation agencies?

There is no cohesive or consistent legislation on vouchers across the EU and nothing to ensure that all

member states adhere to the same rules and regulations. The legislation is also unable to deal with today’s transactions in vouchers and similar instruments.

The voucher and gift card market is thriving and is no longer limited to the traditional paper retail voucher. Vouchers now cover a much wider remit and providers and issuers have encroached into industries that they didn’t necessarily have a presence in before such as electrical, telecommunications and automotive markets.

As the scope of vouchers has widened on a regular basis, UK legislation that was passed four years ago is already looking out of date, and more importantly, doesn’t take into account all the changes that have taken place during this time. It is also widely considered that UK legislation is poorly drafted and requires businesses to work around some technical problems, which it creates.

The European Commission aims to ensure that companies, regardless of the industry or country they operate in, will all adhere to the same guidelines across member states. It aims to remove any inconsistencies that are present in the current system and clarify when VAT should actually be paid on vouchers. Additionally, it wishes to ensure that the VAT burden should be neutral regardless of whether a customer uses a voucher, cash, or any other form of consideration. This is important considering the extent to which some voucher based systems grow increasingly close in terms of functionality to established payment systems like credit cards, debit cards and electronic purses.

The treatment of VAT and vouchers is an issue that is affecting both internal tax administration and cross-border transactions. Why? Because some member states apply VAT at the time of supply whereas others apply VAT at the time of redemption. In addition, not all vouchers are in circulation in all member states causing further confusion.

With no definitive policy in place for all member states, the current system often leaves the possibility open for double or non-taxation on voucher transactions as well as opportunities for tax avoidance.

The main issues that have been highlighted during the consultation stage include:

1. A lack of a definitive definition for the term ‘voucher’
2. The variety of offers available through vouchers, such as a monetary refund, a percentage discount or a free giveaway, all complicating the payment processes
3. The growing variety of sectors that now offer vouchers
4. Ad hoc VAT treatment of vouchers in cases when no clear approach to charging VAT is available
5. Vouchers continuing to evolve in their scope, particularly their flexibility in terms of use and their treatment as more general means of payment
6. Cross-border voucher transactions
7. Cases of breakage or non-redemption

From the issues raised above it is imperative that any future legislation creates a system whereby vouchers could be issued in one member state and redeemed in another without an inconsistent VAT charge; a system that could be enforced effectively without becoming a burden; a system that allows tax neutrality through different payment methods while achieving the same result; and a system that would be able to reasonably adapt to future evolutions in the voucher industry.

Examples of how VAT is currently being applied to vouchers is currently being collated by the Commission and it is understood that it will take approximately six months before a resolution can be drafted and only then will it be debated. This means that new legislation could be put into place in as little as 14 months time, but there is also the likelihood that it will still be under review in three to five years time.