When a gift card is sold we treat that as a normal sale (just like the sale of a product) and we treat it as 20% VAT by default.
Then when it is used we treat it effectively as a discount.
So the sale of a £60 gift card and then it's use would look like this:
Sale of Gift card for £60:
Gift Card Sale - £60
Account: Sales
Tax Rate: 20%
Total VAT £10
Total:
£60 sale with £10 VAT
---
Redemption of gift card against £120 sale:
Sales principal - £120
Account: Sales
Tax Rate: 20%
Total VAT £20
Gift Card Redemption - £-60
Account: Sales
Tax Rate: 20%
Total VAT £-10
Total:
£60 sale with £10 VAT.
If a gift card only covers part of the order value and the rest was paid by say, PayPal, then that order would be allocated to the PayPal gateway summary.
In the instance the full order value was covered by the gift card, there is no other part to the payment.
During the accounts & taxes setup of your Shopify account in Link My Books, the default tax rate applied to both the sale of gift cards and their use is 20% VAT.
If you only sell standard rated products then you do not need to make any further changes.
What if I sell some zero rated products too?
If you sell a mixture of zero-rated and standard-rated goods, HMRC will allow you to zero rate the gift card sale initially and then allocate the correct tax rate when the gift card is later redeemed, depending on the product it is redeemed against.
How to set up Link My Books for Zero Rated gift cards
After you complete the setup wizard, on the Accounts & Taxes Mappings page you will need to make a small adjustment to the tax treatment for gift cards.
Navigate to the Accounts & Taxes Mapping page, via the Accounts & Taxes menu
Click Shopify Sales to expand open that section
Under Gift Cards, change the tax rate from 20% VAT on Income to Zero Rated Income
Click Shopify Refunds to expand open that section
Under Gift Cards, change the tax rate from 20% VAT on Income to Zero Rated Income
How does this work technically in practice?
Example 1: Treating gift card sales as Zero Rated Income, followed by use of gift card against zero-rated products
You sell a gift card for £120 and account for that as zero-rated income.
Then the customer uses that to buy £150 worth of zero-rated products.
Paying £120 on the gift card and £30 by Shopify Payments.
Link My Books will break these transactions down as follows:
£120 Purchase of Gift Card at 0% VAT (£0 VAT)
£150 Sales at 0% VAT (£0 VAT)
-£120 Use of Gift Card at 0% VAT (£0 VAT)
Total VAT: £0.00
This works as both sides of the gift card (sale & redemption) are treated as Zero Rated Income and the VAT on the zero-rated products is accounted for correctly.
Example 2: Treating gift card sales as Zero Rated Income, followed by use of gift card against standard-rated products
You sell a gift card for £120 and account for that as zero-rated income.
Then the customer uses that to buy £150 worth of standard-rated products.
Paying £120 on the gift card and £30 by Shopify Payments.
Link My Books will break these transactions down as follows:
£120 Purchase of Gift Card at 0% VAT (£0 VAT)
£150 Sales at 20% VAT (£25 VAT)
-£120 Use of Gift Card at 0% VAT (£0 VAT)
Total VAT: £25.00
This also works as both sides of the gift card (sale & redemption) are treated as Zero Rated Income and the VAT on the standard-rated products is accounted for correctly.
How are orders treated which have been fully paid by gift card?
To help easily distinguish between the two scenarios, we have created a separate payment gateway for orders which were paid fully by gift card.
Orders that are listed within the Shopify Gift Card gateway "Gift_card_only" will only include all orders where they have been fully paid with a gift card.
Orders where they are partly paid with a gift card will be included in the settlement for the gateway where the rest of the payment was taken from.
