Workflow for gift cards to accommodate VAT and income requirements

1

We sometimes sell gift cards. These can be redeemed at our business for goods or services. However, it has taken me a while to work out how to set up a workflow that satisfies our tax obligations and that reports the income in a way that I find helpful and intuitive. It is not very efficient, so I would welcome suggestions to improve it, or assurance that it is the best solution for our circumstances.

We have set up the following:

  1. Serialised special account for each gift card sold (named, for example, “Gift card 0001”)
  2. Holding account called “Gift card holding” in liabilities
  3. Non-inventory item called “Gift card” that credits the “Gift card holding” account when sold

When we sell a gift card, our procedure is as follows:

  1. Create a new sales invoice and add a line item for the non-inventory item “Gift card” for the amount being loaded onto the card
  2. Create a new journal entry to debit the amount in “Gift card holding” and credit it to the specific special account for the gift card being loaded

When we make a sale against a gift card, we create a new journal entry with the following lines, where c is the cost price of an item and p is the profit we make on it:

  1. Credit inventory item/s being sold with their cost price (c)
  2. Debit “Inventory - cost” account the total cost price of the inventory items (c)
  3. Credit “Inventory - sales” account the total amount being charged to the customer for the inventory item/s (c + p)
  4. Debit the specific special account for the gift card (c + p)

Here is an example in a test business using an item that we purchased for $10 and sold for $15:

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And here is the Summary screen, showing everything as I would expect:

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Note that in this example I loaded the gift card with $20, thus the Accounts receivable shows this amount, and the remaining balance of $5 on the gift card appears as -$5 in Special Accounts under Assets.

There are a couple of important requirements to note:

  1. Our VAT laws dictate that we must declare and pay the VAT on income when it is received. This means that we have to invoice the sale of the gift card itself rather than the items that are sold through redeeming the gift card.
  2. In order to comply with our fiscalisation requirements, each line on a sales invoice has to have an item. This could be an inventory item or a non-inventory item, but we can’t simply leave the “Item” field blank and specify the special account for the gift card being loaded, which would have eliminated the need for the “Gift card holding” account.

Initially, my journal entry for the sale of items against the gift card had a line crediting the items for the sale amount and debiting the gift card account this amount. However, I realised that this results in the profit going into the “Negative inventory clearing” account and not appearing on the P&L.

My concerns with the process are that it involves many steps and it is prone to errors that are difficult to check, particularly regarding entering the costs of items. Any suggestions for improvement would be welcome.

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2

This a generic response as I do not know your country VAT laws.

VAT on gift cards typically applies when they are redeemed, not when they are purchased, as they are considered a form of prepayment or “monetary voucher” rather than a taxable supply.

The VAT is levied on the actual goods or services purchased with the card. I would think of VAT implications only when expired not when still valid.

3

Thanks. Things would be a bit easier for us if we could invoice only at the time the gift card is redeemed. In fact, that is how we were doing it for a number of years, and it worked nicely. Then our accountant made it clear that we have to declare the VAT as soon as we receive the money from the gift card purchase.

Another reason that it helps us to issue a sales invoice for the gift card is that the purchaser can use that for claiming expenses and VAT in their business. Most of our customers are private individuals for whom this doesn’t matter, but we did have a company purchase a gift card from us for a long-serving staff member, and they wanted the fiscalised VAT invoice for the gift card.

4

You need to check again with your accountant - in some countries, VAT is charged on the initial sale of the card and in others it is charged when the card is used

Also, in some countries it depends on who purchases the card

The rules are complicated

5

Our accountant was very clear that VAT needs to be charged on the initial sale of the card. The way I understand it, if our tax authority audits our bank statement, they need to see a corresponding VAT declaration for every inward payment to our account.

The fact that we had been doing it differently for a number of years was because I had made assumptions and hadn’t thought to check the rules. Thankfully we were never called out on it, but we could have been. It was simpler to manage in our accounts, but as I have now learned, not compliant with our laws.