You are thinking of creating a point-based loyalty scheme for your customers. You’ve decided on the terms and conditions for the scheme, however the VAT consequences are a little worrying. How should you tackle them?
Most of the high street chains and big businesses have a loyalty scheme for their customers, so why couldn’t it work for you?. How you run the scheme is totally up to you, although you will need to understand the effects for VAT purposes.
VAT joining fee
There is no immediate consequence for joining customers in your scheme unless you make a charge for this. For example, if you were to decide on a loyalty scheme and you charge the customer for the discount card then you must account for the standard- rate VAT. If you charged £20.00 for the card, then you are charging £16.67 for the membership and £3.33 VAT. However, if like most schemes where there is no charge for membership then there is need to worry about VAT at his stage.
You will only need to think about VAT when a customer redeems their points etc, in exchange for goods or services
Points mean pounds
The three most common methods used for redeeming loyalty awards are:
- The customer gets a discount on the normal purchase price of goods or services.
- You issue them with a face value voucher (FVV) i.e. showing them a value in pounds and pence.
- The customer gets free goods or services when they have earned enough points.
Free goods or services
Free goods and services you supply when a customer redeems loyalty points count as business gifts and;
- where the customer receives free goods from your company, you don’t have to account for VAT unless the cost exceeds £50 in a twelve-month period.
If you offer discounts, you simply charge VAT on the reduced price. The position is similar if you give the customer vouchers, so they can use them to pay for goods or services.