Accounting for Gift Cards

Gift cards can be a tricky concept to get your head around. Whilst it means cash for your business, it’s not actually revenue yet – which means they’re recorded differently to normal sales.

In this blog we’ll look at how you record gift cards, what your VAT obligations are, and what to do once they’ve either been used, or they’ve expired.

How do I record gift cards in my accounting?

Gift cards shouldn’t be classed as revenue, yet – because the purchase or service is yet to be fulfilled. It’s easier to think of gift card purchases like an obligation or agreement that you’ll honour the value of upon redemption.

This means when gift cards are purchased – they should be recorded in your accounting as a liability until:

The gift card is redeemed
Or the gift card expires

Once either of these things happen you can recognise the gift card’s value as revenue.

Will VAT apply to gift card sales?

If you business is VAT-registered, you’ll charge VAT based on the gift card type:

Multi-Purpose Vouchers (MPVs)
Single-Purpose Vouchers (SPVs)

In short, a MPV can be used to buy things with different VAT rates, so VAT is charged when the card is used, not when it’s sold. This works if, for example, the gift card is for a department store which sells baby clothes subject to the 0% VAT rate, but also electronics with 20% VAT added.

SPVs can only be used to buy things with the same VAT rate, and VAT is charged when the card is sold, not when it’s used.

For example, an SVP could be used in a café that only serves food and drink at the standard 20% VAT rate because the VAT has already been charged at the point of sale.

Read our guides to learn more about registering for and charging VAT

Showing this in your bookkeeping

We’ll give you some examples of how (and when) different types of gift card are recorded in your VAT accounts based on what sort of voucher it is. The VAT on Multi-Purpose Vouchers is due at redemption. On Single-Purpose Vouchers, the VAT is due on the sale of the voucher.

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Multi-Purpose Vouchers (MPV)

Let’s continue with the department store example. You sell a £100 gift card which can be used against anything, across different rates of VAT.

You sell a voucher

No VAT is recorded at this point; it’s recorded as a liability. So, you’ll record it like this:

Date	Debit	Credit	Amount
Today	Cash/Bank		£100
Today		Gift Card Liability	£100

The voucher is redeemed

The customer comes into the store with their gift card, and purchases electronics for £60 (which includes VAT at a rate of 20%, so this amount consists of £50 plus £10 VAT), and baby clothing for £40 (VAT 0%).

Your entry will now look like this:

Date	Debit	Credit	Amount
Redemption Date	Gift Card Liability		£100
Redemption Date		Sales Revenue	£90
Redemption Date		VAT Payable	£10

Single-Purpose Voucher (SPV)

Let’s use the SPV example of a café again. It sells Single-Purpose Vouchers that are redeemable only for standard-rate goods (20% VAT).

You sell a gift voucher

The voucher is £100, which includes VAT at a rate of 20%, so the VAT portion is £16.67, and the net sales amount is £83.33. Your entry should look like this:

Date	Debit	Credit	Amount
Today	Cash/Bank		£100
Today		Sales Revenue	£83.33
Today		VAT Payable	£16.67

The voucher is redeemed

Unlike the Multi-Purpose Voucher (MPV), the VAT has already been accounted for. It means Single-Purpose Vouchers (SPVs) don’t need a liability on the balance sheet because they’re treated as an immediate sale.

What if the gift card is only partially redeemed?

For Multi-Purpose Vouchers, the liability is reduced each time the voucher is redeemed – with VAT calculated per redemption until it’s fully used up, or it expires.

Single-Purpose Vouchers already have VAT and sales recorded up front, so redemption entries don’t need to touch the profit and loss account.

What if the gift card expires?

With a Multi-Purpose Voucher, you need to recognise the income without VAT because no supply was made. So, it’ll be recorded like:

Date	Debit	Credit	Amount
Expiry	Gift Card Liability	Sales Revenue	£XX.XX (the value of the voucher)

If it’s a Single-Purpose Voucher, VAT has already been paid at sale, so no further entry is required.

Can issuing gift cards affect my cash flow?

Gift cards can affect your cash flow both positively – and negatively.

On the plus side, they bring in an immediate influx of cash – and many customers spend more than the actual value of the card, which results in more revenue for your business. They can also be a great way to increase revenue due to their seasonal popularity such as around Christmas. This gives you immediate access to funds you might not have had otherwise.

But as we’ve discussed – this income is not revenue just yet, and when customers redeem the gift card, you’ll need to provide goods or services without receiving new cash in that moment. So, what you do with the cash you’ve already acquired is super important. A big wave in redemptions can cause a sudden dip in available cash. Which is something you need to be prepared for!

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