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.