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Referral Program Discounts Are Subject To VAT

Failure to charge VAT can lead to penalties ...


Posted by Roger Eddowes on 15/02/2024 @ 8:00AM

Referral programs have become a common marketing strategy for businesses in the UK. The concept is simple: existing customers are encouraged to refer their friends and family to the company ...

Referral program discounts are designed to bring you more customers, but did you know they are subject to VAT?

Referral program discounts are designed to bring you more customers, but did you know they are subject to VAT?

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In return, they receive a discount or reward for each successful referral. This not only helps businesses to acquire new customers, but also strengthens the relationship with their existing ones by giving them something in return for the referral.

"However, many businesses may not be aware that referral program discounts are subject to VAT!"

This means that businesses are required to charge VAT on the discounted amount, which can have a significant impact on their bottom line. So, why are referral program discounts subject to VAT?

According to HM Revenue and Customs, these discounts are considered to be a form of consideration for the supply of goods or services. This means that the discount is seen as a payment for the referral service provided by the existing customer. As such, it falls under the scope of VAT and is subject to the standard rate of 20%.

But what about businesses that offer free products or services as a referral reward? Even in these cases, the value of the free product or service is still subject to VAT. For example, if a company offers a free month of their subscription service as a referral reward, they would still need to charge VAT on the value of that free month.

It's important for businesses to understand the VAT implications of referral programs to avoid any potential penalties from HMRC. Failure to charge VAT on referral program discounts could result in backdated VAT payments, interest charges, and even fines!

So, how can businesses navigate the tax implications of referral programs? The key is to ensure proper documentation and record-keeping. Businesses should keep a record of all referrals and the corresponding discounts or rewards given. This will not only help with accurate VAT calculations, but also serve as evidence in case of any tax audits.

In addition, businesses should also clearly communicate the VAT implications of referral discounts to their customers. This can be done through terms and conditions or a disclaimer on the referral program page. By being transparent about the tax implications, businesses can avoid any potential confusion or complaints from customers.

It's also worth noting that businesses can claim back the VAT they have paid on referral discounts through their regular VAT return. However, this can only be done if the business is VAT-registered and can provide proper documentation to support the claim.

"While referral programs may seem simple, businesses must be aware of the VAT implications!"

Failure to charge VAT on these discounts can lead to penalties and financial consequences. By understanding the tax implications and implementing proper record-keeping, businesses can successfully navigate the complexities of referral programs and continue to attract new customers through this popular marketing tactic.

Until next time ...

Business Godparent


Would you like to know more?

If anything I've written in this blog post resonates with you and you'd like to discover more about how your own referral program is subject to VAT, it may be a great idea to call me on 01908 774320 and let's see how I can help you.

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About Roger Eddowes ...


Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.

Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.