How do I calculate the VAT on a Sales Promotion?

VAT  Sale

Now Christmas is over the shops are full of sales promotions, discounts, double counts, 50% off but how much VAT should be charged? And what type of business promotion would be best for your business?

Here are some to consider:


Provided you aren’t connected to the person you are selling to, VAT is only payable on the discounted price. If you offer a retrospective discount or volume discount a credit note can be issued when the target is achieved.

Buy one get one free

Sounds simple but needs to be handled carefully as for VAT purposes the default assumption would be that one item is at full price and the other item is a gift, the gift would be subject to VAT (if it’s over £50 in value).  So for accounting and VAT purposes you should sell both items at 50% of their value.

Money-Off Coupons

These work in similar way to Discounts but in some cases the retailer will be able to recover the value of the Coupon from their supplier.


The purchaser pays the full price and gets cash back. Often the manufacturer gives the cash back rather than the retailer, so the retailer accounts for VAT on the full price. The manufacturer pays the Cash Back to purchaser. The Manufacturer can then reduce their output tax for the Cash Back.

Gift Vouchers and Face Value Vouchers

There is no VAT on purchased gift vouchers as they are treated as cash equivalents, its only when they are used to purchase items that VAT needs to be accounted for.

It’s also common for Gift Vouchers to be lost and never used, which is great for the retailers.

If the voucher is sold for more than its cash equivalent then part of the value will be vatable.

Reward Cards

There are several ways to handle these let’s assume the points operator pays the retailer the value of the points, the operator will then reclaim input tax. Alternatives could follow the Discount rules or Voucher rules.

5 thoughts on “How do I calculate the VAT on a Sales Promotion?

  1. thanks for the information, can u plz provide the full journal entries for all the information provided.

  2. Hi Steve

    I am looking to run a marketing promotion whereby the end user gets a gift card for a set value based on a qualifying spend with one of my distributers. This is payable my me based on submission of a form with proof of purchase. Is there any VAT impact on this, as I understand it the gift card expense is a deductible business expense for corporation tax purposes but just wondered if there would be any VAT impact. Ultimately we will still charge the same price to our dealers and they in turn with charge their price plus vat to the end consumer.
    Any comments you can give would be welcome.
    Best regards

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