VAT: Changes to the treatment of supplies made in connection with single purpose face value vouchers following the CJEU Judgment in Case C-520/10. This Brief sets out changes to the VAT rules for certain types of face value vouchers as announced today by David Gauke, the Exchequer Secretary, in a Written Ministerial Statement. These changes will be included within the current Finance Bill and will have retrospective effect to 10 May 2012.

Who needs to read this?

Businesses involved in the sale of single purpose face value vouchers (see paragraph 1.4 below) or which provide goods or services in exchange for such vouchers. Other types of voucher are unaffected by the changes.

1.1 Background

Lebara Limited operated a telecommunications business by which international telephone calls were made available to customers in other member states through the use of face value vouchers. Lebara sold the vouchers to distributors in other member states who then sold them on to other distributors or direct to the end customers. The case before the CJEU concerned the proper analysis of the supplies involved and how such services provided via vouchers should be taxed.

The Court found that, in circumstances such as these, there was a supply of services from Lebara to the distributors, but there was no supply by Lebara on redemption to the end customer. As a consequence, the UK legislation in Schedule 10A, VAT Act 1994 for certain types of voucher is incompatible with EU law.

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

1.2 Consequences of the judgment in outline

As a consequence of the judgment, it has been necessary to amend the VAT treatment of certain types of face value vouchers. This has been in order to safeguard significant revenue and to prevent artificial VAT avoidance. Given the scale of this risk it has been necessary to implement these changes with immediate effect. However, businesses issuing and redeeming the affected types of vouchers will not be required to account for VAT under the new rules until the Finance Bill receives Royal Assent. They will then need to make an adjustment to cover the intervening period. Alternatively, businesses may opt to implement the changes straight away to avoid the need for an adjustment.

1.3 Existing treatment for face value vouchers

The current rules for the treatment of face value vouchers are given in Schedule 10A to the VAT Act 1994. A face value voucher is any voucher, token or stamp that carries the right to receive goods or services to a value shown on it or contained within it. A face value voucher may be physical or electronic.

Under the existing rules there are two main types of face value vouchers: retailer vouchers and credit vouchers.

A retailer voucher is a voucher issued by the same person who will redeem it. This includes, for example, gift tokens sold by a retailer for use in its own shops.

A credit voucher is any type of face value voucher that is issued by one person but which can be exchanged for goods and services from another person. This includes, for example, gift tokens sold by one company that can be exchanged for goods or services in a variety of high street shops.

All the consideration for all supplies of credit vouchers is currently disregarded with VAT being brought to account by the redeemer when the vouchers are exchanged for goods or services. With retailer vouchers the initial consideration on issue is disregarded but the vouchers are then taxed for subsequent supplies. Again the issuer is required to account for VAT on the supply when the voucher is redeemed.

1.4 Affected vouchers

As a result of the changes announced today, 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).

A book token that can be redeemed for zero rated books or standard rated e-books, will not be a single purpose voucher as it can be redeemed for more than one type of supply and they have different rates. Further examples are given below.

1.5 The new treatment of single purpose vouchers

As the announced changes remove single purpose vouchers from Schedule 10A, the special rules for face value vouchers will no longer apply.

Instead where a single purpose voucher is sold both initially and by retailers or distributors, it is treated as a supply of the goods or services for which it can be redeemed. This will apply whether the voucher is issued by the person from whom it can be redeemed or by a third party.

For example a telecommunications company produces vouchers that entitle the holder to £10 worth of telephone calls. It sells a voucher to a distributor for £8 and accounts for VAT on the £8. The distributor recovers the input tax and sells the voucher to a retailer for £9 and accounts for VAT on £9. The retailer recovers the input tax and sells the voucher to the final consumer for £10 and accounts for output tax on £10.

Example 1 Single Purpose Voucher

A UK provider of an online fantasy game sells face value vouchers that can be redeemed for game time or enhancements within the game (both standard rated electronic supplied services). The vouchers are sold to distributors in the UK, other Member States and non-EU countries who sell them on to consumers within their territory.

As the services for which the vouchers can be redeemed are of a single type and at the same rate of tax, they are single purpose vouchers. The supply by the game provider to the distributors is regarded as a supply of electronically supplied services and will be subject to UK VAT when supplied to UK distributors and outside of the scope when supplied to non-UK distributors.

Example 2 Single Purpose Voucher

A group discount provider sells face value vouchers to consumers which carry the right to specific services (for example, a manicure at a particular retailer). Even if contractually the provider is not the supplier of the services to the consumer, for VAT purposes there is a supply by the retailer to the provider and the provider to the consumer. VAT will be due from the provider when the voucher is issued, even if the voucher is never subsequently redeemed.

Other Examples of single purpose vouchers

Prepaid telephone cards that can only be used for making calls

Electronic download vouchers, where they can only be redeemed for downloads, electronic apps, file streaming or other electronically supplied services

Group discount vouchers, where they are redeemed for a specific service or goods

Vouchers for admission to amusement parks which cannot be exchanged for other goods and services in the park

1.6 Other types of vouchers

For all vouchers that do not come within the definition of single purpose vouchers the current VAT treatment described in 1.3 continues.

Example 3 Other type of voucher

A cinema operator sells face value vouchers which can be redeemed for any services or goods provided in its venues, for example watching the film, buying popcorn or merchandise. As these are supplies of more than one type, such vouchers will not be affected by this change and the normal Schedule 10A rules will continue to apply.

Example 4 Other type of voucher

A restaurant offers face value vouchers that can be redeemed against the services provided by the restaurant which include both zero-rated cold take away food and standard rated meals inside the premises. As the vouchers can be redeemed for services which are at different rates of tax, they will not be affected by this change and the normal Schedule 10A rules will continue to apply.

Other Examples of vouchers that are not single purpose vouchers

Shop vouchers for stores selling goods at different rates Book tokens which can also be exchanged for e-books

Garden centre vouchers

Multi-retailer vouchers

Game console vouchers that can be redeemed for goods as well as downloading electronic products Hotel vouchers that can be used in more than one country or that can be used for other items added to the bill (e.g. newspapers)

1.7 Transitional provisions

The changes announced by the Exchequer Secretary include transitional provisions. These apply where a single purpose voucher has been issued before 10 May 2012 (i.e. the consideration has been disregarded) but it is redeemed on or after this date.

The effect of the transitional provisions is to deem a supply for VAT purposes, by the person from whom the goods or services are obtained to the end user, where the supply to the end user is made in the UK. The value of the deemed supply will be the value of the goods or services obtained by use of the voucher. This provision ensures that the redeemer only accounts for the amount of VAT that it would have been required to under Schedule 10A.

So for example a telecommunications company produces a voucher with a face value of £10 that entitles the holder to 80 minutes of calls. It sold a voucher to a distributor for £8 on 1 April 2012 and, in accordance with the previous rules did not account for VAT. On 15 May the end customer who purchased the card uses it to make a 40 minute call – the company must account for VAT on £4. The next day the customer makes a 20 minute call – the company must account for VAT on £2. The customer makes no further calls after that so the company has no further VAT to account for.

1.8 Further Advice

Given the definition of single purpose vouchers used by the CJEU, HMRC do not believe that the judgment will affect a large number of businesses. However we recognise the impact that the new rules will have on those that are affected and that it will take them time to adjust their business arrangements and accounting systems to cope. Businesses with an HMRC Customer Relationship Manager (CRM) should discuss with them any difficulties that they will have in complying with the new rules with a view to agreeing a workable solution.

Businesses that do not have a CRM are welcome to contact our specialist retail unit on 0113 272 9642 in order to discuss any problems that the changes might cause them, or in writing to:

HM Revenue and Customs

Retail Unit of Expertise.

1 Munroe Court

White Rose Office Park

Millshaw park

Leeds

LS11 0EA

Issued 10 May 2012

Source: HM Revenue & Customswww.hmrc.gov.ukCopyright Acknowledged.