Accounting with a future-ready approach

We are aware there are often incentives of buying gift cards on platforms which mean the amount you pay for inventory (footwear/clothing) at certain high street retailers is discounted, but gift cards themselves come with separate VAT implications. For many retailers, discounted gift cards, cashback offers and loyalty rewards can be a useful way to reduce stock costs and improve margins. However, it is important to understand that the VAT treatment of a gift card is different from the VAT treatment of the goods ultimately purchased with it. VAT at the Point of Purchasing a Gift Card A common misconception is that VAT can be reclaimed when a gift card is purchased. In most cases, a gift card is simply a payment mechanism that can be used at a later date. Purchasing the gift card does not mean stock has been acquired and does not usually provide evidence to support an input VAT claim. As a result: No VAT is typically reclaimed when the gift card is purchased. The gift card should generally be treated as an asset until it is redeemed. The purchase of the gift card alone is not enough to support a VAT claim. HMRC's guidance on vouchers explains that the VAT treatment of vouchers and the underlying goods can occur at different stages depending on the type of voucher involved. Businesses should therefore avoid assuming that VAT recovery arises simply because money has been spent on a gift card. When Can VAT Be Claimed? For most retailers, VAT recovery arises when the gift card is used to purchase inventory and a valid VAT receipt or VAT invoice is obtained. For example, if a business purchases a £1,000 gift card and subsequently redeems it against footwear or clothing stock, it is the VAT invoice from the supplier that supports the VAT claim, not the original gift card transaction. Maintaining copies of VAT receipts is therefore essential. Without suitable evidence, HMRC may challenge any input VAT reclaimed. Retailers should also remember that VAT is not always charged at 20%. Whilst adult clothing and footwear are generally standard-rated, many children's clothing and footwear items are zero-rated. Using the correct VAT shown on supplier invoices is therefore far more accurate than estimating VAT based on overall spend. Keep Track of Your Gift Card Balance From a bookkeeping perspective, it is important to know how much value remains on gift cards that have not yet been redeemed. Many businesses track gift card purchases separately until they are used, ensuring that stock purchases and VAT claims are only recognised when appropriate documentation is received. Regular monitoring helps: Keep accounting records accurate. Avoid forgotten or expired balances. Reconcile purchases more efficiently. Ensure VAT is only reclaimed when supported by valid evidence. If you are unsure how gift cards should be recorded within your accounting software, speak with your accountant or bookkeeper. A simple process established from the outset can prevent complications later. What About Cashback and Rewards? Many gift card platforms offer cashback, account credits or reward schemes when businesses purchase gift cards. Whilst these incentives reduce the overall cost of purchasing stock, they do not automatically affect the VAT treatment of the inventory acquired. In many cases, the cashback is separate from the supplier's VAT invoice and should be considered independently from the VAT recovery position. Where significant cashback amounts are involved, it is worth discussing the treatment with your accountant to ensure a consistent approach is being applied. HMRC Compliance and Record Keeping Should HMRC ever review your VAT returns, a clear audit trail is invaluable. Businesses should retain: Evidence of gift card purchases. Records of gift card balances and redemptions. Supplier VAT receipts and invoices. Any credit notes relating to returned stock. This is particularly important where stock purchases include a mixture of standard-rated and zero-rated products. If goods purchased using a gift card are subsequently refunded, businesses should also retain any credit notes and ensure accounting records reflect the revised VAT position where necessary. Final Thoughts Discounted gift cards can be an effective way to reduce purchasing costs, but the VAT treatment is often misunderstood. As a general rule: ✅ Purchasing a gift card does not usually create a VAT reclaim. ✅ VAT is normally reclaimed when the card is redeemed and supported by a valid VAT invoice or receipt. ✅ Children's clothing/footwear may be zero-rated, meaning VAT should always be based on the supplier's documentation. ✅ Cashback rewards should be considered separately from the VAT treatment of the inventory purchase. ✅ Maintaining visibility of outstanding gift card balances is important for both bookkeeping and VAT compliance. With the correct records and processes in place, retailers can benefit from gift card savings while maintaining accurate accounting records and remaining compliant with HMRC requirements. Further reading: https://www.gov.uk/guidance/business-promotions-and-vat-notice-7007#vouchers-from-1-january-2019 https://www.gov.uk/vat-record-keeping

Many online resellers focus heavily on sourcing and sales growth, but far fewer pay enough attention to the systems needed to manage VAT correctly. If you're selling a mixture of adult products (standard-rated VAT), second-hand goods under the Margin Scheme, and children's products that qualify for zero-rating, VAT quickly becomes more than an accounting exercise. It becomes a data management challenge.