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#1 04-04-2019 08:41:23

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
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VAT Amount when redeeming loyalty points.

Hi Nick.

A customer just picked up on a potential VAT calculation issue that appears to have been the same for many years. No one else has ever questioned it, but I think they are correct.

When loyalty points are redeemed, the value is deducted from the total amount payable. However the VAT still shows the amount of VAT charged before the loyalty point discount.

Example below shows goods plus delivery at £51.75 plus VAT amount of £10.35 = £62.10. Loyalty points are then deducted so total payable is £49.30.

The loyalty point value(exc VAT) should be deducted from the subtotal before the VAT is calculated.

Although the end result is the same, the customer has actually paid £41.08 plus VAT = £49.30 so the vat totals on the invoice are incorrect as they should be £8.22
Invoice should show loyalty point discount of £10.67 ex VAT from the subtotal before the VAT is calculated.

Item Subtotal Exc VAT
£ 46.75
Delivery Exc VAT
£ 5.00
VAT
£ 10.35
Loyalty Points Redeemed (128)
-£ 12.80
Total
£ 49.30

Or am I going mad??


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#2 04-05-2019 06:43:20

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Re: VAT Amount when redeeming loyalty points.

Loyalty points are considered a form of payment in K9 like a gift certificate or credit, so the points redeemed come off the total order amount like a payment.  K9 is correct in handling points redemptions this way.  in previous versions points were treated as discounts which reduced the subtotal, and thus the taxable amount - which we found when building K9 was not a proper way to account for points redemptions.  So you are right in what you are seeing, and what you are seeing is an accurate calculation.


Nick Hendler

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#3 04-05-2019 08:23:04

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
Website

Re: VAT Amount when redeeming loyalty points.

If someone is paying me £49.30 for an order, they are paying £8.22 worth of VAT and I am going to pay the VAT man £8.22. If the customer is VAT registered, they will only be able to reclaim £8.22 in VAT.

If the invoice is showing the VAT amount as £10.35 - the invoice is incorrect as I am not paying £10.35 to the VAT man and my customer cannot reclaim £10.35

I really can't see how the way it is currently done can be correct but I will run it by my accountant.


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#4 04-05-2019 13:53:34

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Re: VAT Amount when redeeming loyalty points.

The points are treated as a payment - like a check, gift certificate, cash or credit card payment.  They used to be treated as discounts, which incorrectly decreased VAT on orders.  Please run this by your accountant.  We had several other clients do the same during development to be sure points would be treated properly.


Nick Hendler

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#5 04-05-2019 15:00:52

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
Website

Re: VAT Amount when redeeming loyalty points.

I fully expect you to be correct! Just seems incorrect to the uneducated.

My accountant is checking. When I have documented proof you are correct, I will post it here in case it crops up again.

I think this from HMRC covers it:

https://www.gov.uk/guidance/business-pr … ty-schemes


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#6 04-06-2019 07:37:50

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Re: VAT Amount when redeeming loyalty points.

Thanks for posting the HMRC link.  I tried to find that yesterday.  Even HMRC is convoluted in the description.  Please post back when you have an opinion from your accountant, as I'd like to see that too.


Nick Hendler

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#7 04-09-2019 08:04:13

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
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Re: VAT Amount when redeeming loyalty points.

Hi Nick

My (very qualified) accountant asked a HMRC VAT Expert for assistance  and in the opinion of a VAT Expert, the software is incorrect.

I provided an example of how the software calculates the VAT(VAT was £11.60) and how much I would have expected it to be based on amount actually paid(£11.43)

VAT EXPERT:
I agree with the client that VAT is 1/6 of the payment received ie £11.43 in his example. But it is strange that the software company doesn't agree. What i suggest is that your client goes back to his contact at the software company and quotes HMRC's guidance in VAT Notice 700/7, para 10.9, the second paragraph seems to cover the situation. "Consideration" means payment in VAT speak.

LINK: https://www.gov.uk/guidance/business-pr … ty-schemes

MY ACCOUNTANT:
That’s odd as I thought the opposite? My research was tying me in knots but I concluded that the £1 reward would be deemed consideration? So total consideration is value of points plus cash?

VAT EXPERT:
yes, you would expect the software company to get it right, which is why I had a bit of a doubt - but following the Gibbs case a few years ago, there has been a clear outcome that VAT is only due on 'consideration' received - there is no doubt that the reward points are not 'monetary consideration' - so the question is whether they are classed as 'non-monetary consideration' - below is the extract defining non-monetary consideration from the HMRC manual - it doesn't mention reward points.

HMRC MANUAL:
"Non-monetary consideration exists when a supply is made in return for payment in the form of goods or services. In some cases there may be a non-monetary consideration in addition to the monetary consideration. Where there is non-monetary consideration only, a “barter transaction” has taken place. The valuation rule to be applied to the non-monetary consideration is the same, whether or not any monetary consideration has also been provided. "

MY ACCOUNTANT:
It would appear from his advice that your software company have it wrong and that the amount before VAT should be discounted.


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#8 04-10-2019 07:28:11

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Re: VAT Amount when redeeming loyalty points.

I'm reading that the accountant and tax expert both concur that points are not a form of payment, and do not represent a liability when issued.  It seems they're in agreement the points are like a discount, not a payment.  That's the exact opposite of treatment in K9 where they are treated like a payment (think gift certificate).  I'm wondering what the response would be concerning gift certificates given away with purchases and then used to place orders.  Same treatment or different answer?


Nick Hendler

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#9 04-10-2019 08:32:57

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
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Re: VAT Amount when redeeming loyalty points.

My logical opinion.....
A gift certificate would almost certainly need to be the same as a discount as the VAT has already been paid/reclaimed in the original purchase.

If a customer purchases a £48 gift certificate, they are purchasing a £40 discount on the pre VAT cost of a future order.

So when the gift certificate is used to purchase £100 plus VAT worth of goods, the invoice should read £100 less £40 = £60 plus VAT @ £12 = £72

I don't use gift certificates so can't check, but I expect from your response they are treated the same as loyalty points so K9 will currently show £100 plus VAT @ £20 = £120 less gift certificate @ £48 = £72

If the end user was VAT registered and purchased both the gift certificate and the subsequent goods(obviously very unlikely), currently they would be reclaiming £8 VAT from the original purchase and £20 from the purchase of actual goods - Total reclaim of £28. They have only really purchased £100 plus £20 worth of goods, so should only be reclaiming £20 in VAT.


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#10 04-11-2019 07:40:32

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Re: VAT Amount when redeeming loyalty points.

I've followed up on this to determine why we did what we did in K9.  It all comes down to whether or not the points are considered compensation.  The opinions received which prompted K9 to treat points as it does all considered points as compensation.  They are provided to the customer as compensation for making a purchase (points have monetary value and are stored in an account), and when redeemed, represent compensation paid to settle the order (cash).  It seems we're in a gray area here where if you consider points compensation, K9 works as expected, and if they are not considered compensation it's not right.   We're considering points as compensation as per opinions we obtained when building the software.


Nick Hendler

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#11 04-11-2019 11:27:41

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
Website

Re: VAT Amount when redeeming loyalty points.

When was the change made in the software?? The first release of K9?? or wasn't it changed until 9.1??
I am going to have to change it back as my research and advise suggests it is wrong.

Example to show why it is currently incorrect,  customer buys £10 plus VAT worth of goods. Invoice shows £2 VAT has been paid. Customer has £12 worth of loyalty points and redeems them all so the balance is zero. The invoice shows the customer has paid £2 VAT and can claim back £2 from the taxman, even though they haven't paid a penny. Logically this cannot be correct - you cannot claim back VAT when you have paid it in the first place. In addition, the invoice suggests I should pay £2 worth of VAT on the sale even though I haven't received a penny in payment.

This link explains it very well:
https://blog.companies999.co.uk/tackle- … customers/

If you offer a discount the VAT position is simple; VAT is payable on the discounted price. How you show this on your invoice or receipt is up to you, as long as the actual discounted price is clearly shown.

If you issue a Face Value Voucher(Loyalty points in K9's case) to a customer to pay for goods you supply, for VAT purposes it’s treated in the same way as a discount. That is, you only have to charge VAT on the net amount, which again must be clearly shown on your invoice or receipt.


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#12 04-12-2019 07:01:30

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Re: VAT Amount when redeeming loyalty points.

This change was present in 9.0.0.  Version 8.0.9 was the last version that treated points as discounts and not payment. 

We're going to have to run this by several people to determine what to do here.  When K9 was built the advice at that time was to treat the points as payment as they are earned, then paid.  I see what you're outlining here, but it doesn't make sense to me based on the advice we received when building K9.  We have many clients in the UK/EU who are using K9 and the points system and this has not come up as a problem until now, so we have to exercise due diligence when contemplating making a change in this regard.  If something does need to be changed, it will be a massive change which will need to be done in update 9.0.4 (the next update). 

For your particular case, for now, you could disable points redemption at checkout and instruct customers in order to redeem their points they should contact you (set up a form for this), to allow you to convert their points to a discount code for use.


Nick Hendler

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#13 04-13-2019 06:01:00

zanart
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From: bedford
Registered: 04-02-2008
Posts: 1592
Website

Re: VAT Amount when redeeming loyalty points.

We have many clients in the UK/EU who are using K9 and the points system and this has not come up as a problem until now

I think the reason this hasn't been highlighted is because loyalty points are virtually always used by retail customers, not VAT registered businesses - certainly on our site anyway.
Most large business customers on our site check out as a guest, or don't ever bother using the loyalty points. Only smaller businesses were the owner is responsible for the buying really use the loyalty point scheme to save money, larger businesses don't seem to care.


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#14 04-15-2019 07:04:11

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Re: VAT Amount when redeeming loyalty points.

Understood.  We're looking into this.


Nick Hendler

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