Gift cards are almost everywhere. Shops, restaurants, online stores, etc. At first glance, they look simple. A customer buys a card and redeems it later. But behind this simple flow, there is accounting, VAT, and legal rules that need attention.
If you get the rules regarding accounting for gift cards wrong, you can misreport revenue and might have liability problems too.
This guide walks you through everything you need to know about gift cards in the UK.
By the time you finish, you’ll know:
- What exactly are Gift Cards?
- Types Of Gift Cards & What’s The Best One For You?
- How are Gift Cards Recorded in Accounting?
- And Much More…
Let’s get into it!
What Are Gift Cards?
Gift cards are prepaid cards with a monetary value that can be used as an alternative to cash for making purchases. They are often called vouchers or gift vouchers. And they come in various forms, including physical plastic cards, e-cards, and digital codes.
Gift Cards Are a Liability, Not Revenue (Yet!)
This is the very first and most important thing to get your head around.
When a customer hands over cash for a gift card, you receive money. But you have not actually earned it yet. You have not supplied any goods or services. What you have done is taken on an obligation, or a promise, to provide something later on.
- You have taken the cash (asset).
- You have created a debt or a promise to deliver (liability).
This means that the money from a gift card sale does not go directly into your Sales Revenue account. Instead, it sits on your Balance Sheet as a current liability, which is often referred to as Deferred Revenue or Gift Card Liability.
How Are Gift Cards Recorded in Accounting?
Here’s how gift cards are recorded in accounting:
1. When the Gift Card is Sold
When a customer hands over cash for a gift card, you get the money. But you can’t call it revenue just yet. Instead, you record it as an obligation to the customer.
Example: Selling a £100 gift card
| Date | Account | Debit | Credit | Description |
|---|---|---|---|---|
| Sale date | Cash | £100 | Received cash for gift card | |
| Gift Card Liability (or Deferred Revenue) | £100 | Recognised liability to customers |
2. When the Gift Card is Redeemed
When the customer uses the gift card to make a purchase, you can finally record that money as revenue and reduce the liability.
Example: A customer spends £60 of the £100 gift card
| Date | Account | Debit | Credit | Description |
|---|---|---|---|---|
| Redemption date | Gift Card Liability | £60 | The customer uses the gift card, reducing the liability. | |
| Sales Revenue | £60 | Recognised sales revenue |
3. When the Gift Card Expires (Breakage)
If a customer never uses the full amount on their gift card before it expires, that leftover money is known as breakage. And the business can then recognise the unspent money as revenue because it is no longer obligated to the customer.
Example: The remaining £40 on the card expires
| Date | Account | Debit | Credit | Description |
|---|---|---|---|---|
| Expiry date | Gift Card Liability | £40 | Removed remaining gift card liability | |
| Breakage Revenue | £40 | Recognised revenue from breakage |
What are the Types Of Gift Cards?
Have you decided a gift card is the way to go? If yes, the next thing you need to do is decide which type of gift card is the right fit for you. It is not as complicated as it might sound!
So let’s break down the main types of gift cards to help you decide:
1. The Single-Shop Gift Card
This is probably the most familiar type of gift card. You can use this gift card only at one specific shop or brand.
2. The Multi-Shop Gift Card
Unlike single-shop gift cards, multi-shop gift cards offer flexibility. It can be spent at a whole bunch of different places, from high street shops to online stores.
3. The “Like Cash” Gift Card
This gift card gives the recipient the maximum freedom on where to spend the money. It works pretty much like cash but in a card format. It usually carries a Visa or Mastercard logo. And it can be used almost anywhere that accepts that payment network
4. The E-Gift Card (Digital)
Need a gift in a hurry? A digital or e-gift card is your saviour. This is super convenient, especially for last-minute presents or for recipients who live far away. The recipient simply gets a code they can use online or a barcode to scan from their phone in a shop.
5. The Physical Gift Card
Sometimes, a real, physical gift just feels more special. It’s perfect for giving a gift in person and makes the present feel more substantial. Many retailers offer both physical and digital options, so you can pick what fits the occasion best.
UK Legal & Consumer Rules Regarding Gift Card You Must Know
In the UK, there are a few legal things to keep in mind when dealing with gift cards. These rules decide how you can handle expiry dates, terms and conditions, and any unused balances.
Are Expiry Dates Allowed?
Yes, you can set expiry dates for vouchers in the UK but only if the expiry terms are fair and clearly mentioned. The Consumer Rights Act 2015 law protects customers from hidden or unfair terms. So if you set the expiry date is not properly explained, it could be challenged. Most businesses keep expiry periods between 12 and 24 months. Though some allow longer periods.
What Happens If A Voucher Expires?
If a customer tries to use an expired card and your terms are clear, you’re legally allowed to refuse redemption. But if your terms are ambiguous or hidden, a court or regulator may require you to honor it. Also, if your business stops trading, customers may lose their right to use the voucher. Unless there are protections under insolvency laws. In short, being transparent and fair with your gift card will keep both you and your customers protected.
IS There VAT on Gift Cards
For VAT on gift cards, the golden rule is knowing when the tax needs to be paid. The answer depends entirely on whether it’s a Single-Purpose Voucher (SPV) or a Multi-Purpose Voucher (MPV).
- For a Single-Purpose Voucher (SPV), like the “single shop” or “e-gift” we’ve mentioned above, the VAT is handled right away. Since everyone knows what the card can buy and what the VAT rate will be, you treat the sale of the card just like a regular sale. The tax is paid when the customer buys the voucher. No further VAT is due when they actually redeem it.
- For a Multi-Purpose Voucher (MPV), like the “multi-shop” card you described, you can’t be sure of the VAT until the customer uses it. This is because the items they can buy might have different tax rates (some standard, some zero-rated). So, you don’t account for any VAT when you sell the card. The tax only becomes due later, when the customer redeems the voucher for goods or services, and it’s calculated based on what they actually buy. If the card is never used, no VAT is paid at all.
What About Gift Cards Given to Employees or as Promotions?
Sometimes businesses give out gift cards for free as part of a promotion (e.g., “Buy £100 of products, get a £20 gift card”). This changes the accounting slightly.
- No initial cash: Since you didn’t receive cash for the promotional card, you don’t debit cash or credit the liability when you issue it.
- Deferred Discount: The promotional card is treated as a deferred discount on the initial purchase.
- When redeemed: When the customer uses the free card, you’ll debit the liability account and credit sales revenue, just like a regular card. The cost of the promotion is effectively recognised as a reduction in the transaction price of the initial qualifying sale or is sometimes expensed as a marketing cost, depending on the specific accounting policy adopted under IFRS 15. The main thing is to track these separately and not overstate your true sales revenue.
Practical Tips for UK Businesses Running Gift Card Schemes
Here are few tips to make your life easier and your accounting safer:
- Set clear voucher terms: Display issue date, expiry (if any), restrictions, how refund works. Make sure customers see these before purchase.
- Choose reasonable expiry: 12–24 months is common. Don’t enforce very short periods that may look unfair.
- Track each voucher: Maintain a ledger/database with issue date, face value, redemptions, residual balance.
- Reconcile regularly: Match the liability account in your books to the actual sum of outstanding voucher balances from your system.
- Use a contra-liability account: For breakage recognised, so you can see original liabilities vs adjusted ones.
- Document your breakage methodology: Keep historical data, show consistency, and update over time.
- Automate journal entries: If possible, connect your POS / voucher system to accounting software so entries flow automatically and errors are reduced.
- Disclose in accounts: In financial statements, include notes explaining how you treat vouchers, breakage assumptions, possible risks.
- Review policies periodically: As redemption patterns shift, your breakage assumptions may need updating.
- Coordinate with tax/VAT advisors: Mistakes in VAT treatment of vouchers can lead to tax surprises or penalties.
- Educate staff: Ensure sales teams, customer service, and finance all understand how vouchers work so that refunds, replacements or disputes don’t mess up your books.
Can Issuing Gift Cards Affect My Cash Flow?
Absolutely. Selling a gift card means you get cash upfront before providing any goods or services. This is great for short term cash flow. But remember that money isn’t truly “earned” until the card is redeemed. When customers use their cards later, you’ll need to deliver the goods or services without getting new cash at that moment. So, while gift cards can improve your immediate cash position, it’s smart to plan ahead for the future redemptions.
Why Do I Need to Worry About Vouchers?
Because they come with VAT and accounting implications. Businesses must record the sale correctly. Not as income, but as a liability. The timing of when VAT applies also depends on whether it’s a single-purpose or multi-purpose voucher. Mismanaging this can lead to VAT errors or inaccurate financial statements. So, understanding how vouchers work helps you stay compliant.
What If the Gift Card Is Only Partially Redeemed?
If someone uses only part of a gift card’s balance, VAT and revenue are only recognised on the amount used. The unused balance stays recorded as a liability until it’s either spent or expires. That means your accounts should always reflect how much value is still outstanding. So you can track what’s still owed to customers.
What Happens If No One Comes to Redeem the Gift Card?
Unredeemed or expired gift cards are quite common. In that case, the remaining balance can usually be recognised as income after the card expires. VAT treatment can vary depending on the type of voucher, but generally, you’ll account for VAT only when the sale becomes final. It’s always best to keep clear expiry terms and proper records to make this process simple and audit-proof.
How To Record Gift Card Sales In QuickBooks?
To record gift card sales in QuickBooks, create a liability account for the unredeemed gift card. Then create a sales receipt or invoice. On the receipt, add a line item for your “gift card” product. Enter the sale amount and record the payment to “Undeposited Funds” or a similar clearing account. The sale is not recorded as income until the customer redeems the gift card.
The Bottom Line
Accounting for gift cards is really all about timing. Make sure you recognise the money as a liability first, and only move it to revenue when you’ve done the work, supplied the goods, or when the card has expired.
Getting the SPV/MPV VAT distinction right is also non-negotiable for HMRC.
WE CAN HELP
At Accotax, we understand that accounting for gift cards can be complex. Our team of experts is here to guide you through the process, ensuring compliance and accurate financial reporting.
Reach out, get an instant quote and let us help you grow your business!
Disclaimer: The information about the “Accounting for Gift Cards In UK: A Comprehensive Guide 2025” is provided in this article including text and graphics. It does not intend to disregard any of the professional advice.