The Hidden Complexity of Gift Cards
Gift cards feel simple on the surface. A customer pays £50 for a voucher, and later, someone uses it to buy your product or service. Easy, right?
Not quite.
For businesses, gift cards are not just sales. They’re promises. They represent money received today but goods or services owed in the future. And that means accounting, VAT, and tax treatment can get tricky.
At Rothstone Accountants, we’ve seen too many businesses treat gift cards like straightforward sales—only to run into problems when HMRC reviews their books. The good news? With the right approach, gift cards can be both profitable and compliant.
How Gift Cards Work in Accounting Terms
When a customer buys a gift card, you receive cash—but you haven’t yet delivered a product or service. So, technically:
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It’s not income yet.
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It sits on your balance sheet as a liability (something you owe).
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Only when the card is redeemed does it become revenue.
📊 Table 1: Gift Card Accounting – Step by Step
| Stage | What Happens | Accounting Treatment |
|---|---|---|
| Customer buys £50 card | You receive £50 cash | Record as liability (“Deferred revenue”) |
| Customer redeems card | You provide goods worth £50 | Reduce liability, recognise £50 as revenue |
| Customer doesn’t redeem (expiry) | Card expires unused | Transfer liability to revenue |
This is where mistakes happen: many businesses record the £50 immediately as revenue. That can overstate income, distort VAT, and leave you exposed at year-end.
VAT Treatment of Gift Cards
VAT on gift cards isn’t one-size-fits-all. It depends on the type of voucher:
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Single-purpose vouchers: If the VAT rate is known at the time of sale (e.g., a gift card for a hair salon service at 20%), VAT is due when the card is sold.
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Multi-purpose vouchers: If the VAT rate isn’t known until redemption (e.g., a store card that could be spent on various items), VAT is due when the card is redeemed.
📌 Example:
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A restaurant gift card = single-purpose voucher (VAT at 20% on sale).
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A retail store card = multi-purpose voucher (VAT at point of redemption).
This difference matters, especially if you sell both types. Rothstone Accountants helps businesses separate, record, and report VAT correctly so nothing slips through the cracks.
The Breakage Factor (Unredeemed Cards)
Not all gift cards are redeemed. In fact, studies show 10–20% of gift card balances go unused—called “breakage.”
For accounting:
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Breakage is usually recognised as income when the card expires, or after a set period if you can reliably estimate redemption patterns.
For businesses, this can actually be good news—it’s extra revenue with no cost. But it must be recognised at the right time, not randomly.
✔️ Checklist: Handling Breakage Properly
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Do you track expiry dates for your gift cards?
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Can you estimate typical redemption rates?
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Do your terms and conditions clearly set expiry rules?
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Are you recognising breakage consistently in your accounts?
Rothstone Accountants helps clients set up policies and systems that keep HMRC satisfied and ensure profits are recognised fairly.
Common Mistakes Businesses Make
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Recognising sales too early – Treating the purchase of the gift card as immediate revenue.
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Ignoring VAT rules – Not distinguishing between single-purpose and multi-purpose vouchers.
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Forgetting expired cards – Never moving unused balances into revenue.
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Not reconciling liabilities – Letting unredeemed balances sit on the books indefinitely.
📌 Case Example:
We worked with a retail client who had £30,000 sitting in “unredeemed gift cards” from years of sales. They hadn’t recognised any of it as income. We helped them review expiry terms, apply breakage rules, and correctly release £6,000 into revenue—boosting their year’s profits legally and safely.
How Rothstone Accountants Makes Gift Card Accounting Simple
Here’s what we do for clients:
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Set up proper systems – Automating gift card tracking in accounting software.
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VAT categorisation – Separating single vs multi-purpose vouchers.
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Liability management – Ensuring balances are reviewed and reconciled regularly.
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Policy advice – Helping businesses write gift card terms that make accounting easier.
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Strategic insight – Showing how gift cards affect cashflow, profit, and tax planning.
With Rothstone Accountants, gift cards stop being a headache and start becoming a reliable tool for boosting sales and improving customer loyalty.
Don’t Let Gift Cards Trip You Up
Gift cards are great for cashflow and customer engagement—but without proper accounting, they can quickly become a compliance nightmare.
By understanding when to recognise revenue, how VAT applies, and what to do with unredeemed balances, you protect both your books and your business.
At Rothstone Accountants, we’ve helped retailers, restaurants, and online shops turn gift cards into a strength rather than a risk. If you’re selling vouchers, we’ll make sure they’re accounted for correctly, efficiently, and in line with HMRC expectations.
👉 Thinking of launching gift cards, or already selling them? Speak to Rothstone Accountants at www.rothstone.uk to make sure your accounting is watertight.
