The Government has announced a change in legislation effective from10th May 2012 which it describes as necessary to protect public finances and prevent tax avoidance. This follows a decision of the Court Justice of the EU which affects the way in which the UK treats certain face value vouchers for VAT.

In a Written Ministerial Statement, it was announced that legislation will be introduced as part of Finance Bill 2012 to align domestic legislation with the relevant EU Directive. The Legislation is also intended to guard against potential artificial avoidance of VAT though the use of face value vouchers.

Although the legislation will apply from 10 May, the Written Ministerial Statement confirms that any VAT due arising from its operation will not become payable until after Royal Assent of Finance Bill 2012. Until then, suppliers may continue to account for VAT under the current rules. They will then need to make an adjustment to cover the intervening period.

HMRC have also published Revenue & Customs Brief 12/12 which sets out the changes in more detail. These legislative changes will affect businesses involved in the sale of single purpose face value vouchers or which provide goods or services in exchange for such vouchers. Other types of voucher are unaffected by the changes.

HMRC consider that the decision in the CJEU Judgment in Case C-520/10 Lebara Limited whereby there was no supply by Lebara on redemption of the vouchers to the end customer means UK legislation for certain types of voucher is incompatible with EU law.

Although the Lebara case was concerned with the supply of telecommunications services via the use of a voucher, in HMRC's view the principles considered by the Court are of general application and apply to other single purpose vouchers that can be used to obtain only one type of good or service.

As a result of the changes announced, single purpose face value vouchers will be taxed when they are issued. This will affect all single purpose vouchers, whether credit, retailer or other types of voucher. A single purpose face value voucher is one that carries the right to receive only one type of goods or services which are all subject to a single rate of VAT.

For example, where a prepaid telephone card can only be redeemed for telecommunication services it will be a single purpose voucher. Similarly a voucher that can be redeemed only for electronically supplied services will be a single purpose voucher even if the electronic service can have slightly different forms (e.g. streamed movies, music or games).

More information is available at http://www.hmrc.gov.uk/budget-updates/march2012/index.htm#10May12vat and Brief 12/12 is reproduced in full on here