It’s not that taxing

The voucher sector is voicing concerns about Government intentions to revise VAT on vouchers. But as it is an industry that is prospering, seeing sales and profits rise as others suffer a slowdown, any rise in taxes is unlikely to hit it hard.

The voucher industry is doing remarkably well at the moment with many companies expecting growth of between ten and 15 per cent this year. According to Voucher Association figures, its 23 members, which represent about 75 per cent of the total market, did business totalling £1.15bn last year – including a 21.8 per cent growth in corporate sales of vouchers in the business-to-business market. Sales of vouchers in the final quarter of 2001 were 16.4 per cent ahead of those a year before. There are not many sectors that can produce similar figures right now.

The problem with vouchers, however, is that they have always been dogged with tax-avoidance issues. This has meant that twice in the past few years, the industry has had to face the Treasury.

Just over two years ago, the Government ruled that vouchers were liable for National Insurance Contributions (NICs), which meant companies had to pay NICs on any vouchers that were awarded to staff. The Government’s motivation was to stop companies paying their staff in vouchers in lieu of cash, thereby avoiding NICs.

At the time, the industry was horrified and expected to be hit badly by the new law – especially as the ruling effectively added ten per cent to the cost of vouchers. As it turned out, however, voucher providers experienced a dip in business, but it soon bounced back. Companies admit that Christmas sales are not quite what they used to be, but the NIC ruling has not had a serious long-term impact on business.

In his last budget, Gordon Brown, announced that Customs & Excise would be looking at value-added tax (VAT) on vouchers. Once more, the industry has been in a spin. But it seems, again, that the impact may be minimal.

Prior to a meeting between the Voucher Association and Customs & Excise in mid-June, voucher companies were desperate to find out what the Government had in mind. In fact, the Treasury website spelt it out signalling “a package of VAT anti-avoidance measures which will help to protect the tax base, remove distortions and ensure that businesses pay their fair share of tax …[and] following consultation, legislating at the earliest opportunity to block loopholes in the VAT treatment of face-value vouchers…”

On the face of it…

The crucial phrase is “face-value vouchers”. At present, VAT is paid on the sale price rather than on the face value of the voucher. Therefore, if the voucher is being sold with a discount of ten per cent, VAT is only paid on the 90 per cent left. Effectively, the discount – which varies from scheme to scheme and issuer to issuer – is VAT-free, making vouchers an attractive option for sales promotions. Selling vouchers at a discount is considered normal business practice in this sector. One source says it has even been known for subsidiary companies to be set up in order to sell the parent company’s vouchers at a discounted price. This means the company saves a lot of money in VAT payments.

On June 19, Customs & Excise had a meeting with the Voucher Association, but the official consultation document had not been issued. Nevertheless, Capital Incentives managing director Graham Povey says he was “encouraged” by the meeting and does believe the Government intends to target the voucher industry with more, unnecessary, tax burdens.

“The key point for us is that this issue is not like the NICs one. Customs & Excise is just looking to cut out VAT avoidance. It is not looking to impose VAT on all vouchers,” Povey explains.

What worries him, however, is the uncertainty that surrounds impending legislation, which Povey believes makes people more nervous of buying into vouchers.

But until the consultation document has been issued, no one is really prepared to comment on what the detail is likely to mean to the industry. So questions still remain. Will closing this loophole make administering schemes more difficult? Who will pay the extra VAT? Will this complicate using the most simple incentive and sales promotion tool?

But this is no David and Goliath scenario. It is not just the Voucher Association having to do battle with the Treasury. As Yvonne West, chairwoman of the Voucher Association and business direct manager of Sainsbury’s, says: “The Voucher Association cannot negotiate this on its own. But we have all the retailers behind us including the British Retail Consortium (BRC) and organisations like the Institute of Sales Promotion (ISP) – and that is a big deal.”

One company that has single-handedly confronted the Government over VAT issues is High Street Vouchers. It acts as a multi-redemption operation, enabling voucher-holders to redeem vouchers at more than 70 retailers throughout the country.

A few years ago, the Government decided that High Street Vouchers should be paying VAT on the service fee it charged for handling the various retailers’ vouchers. High Street Vouchers took the Government to court and won; the Government then won on appeal.

High Street Vouchers marketing director Mark Lucius is incensed that the Government is contemplating anything to do with VAT and vouchers. “We’ve had our best brains working on this, and we still don’t know what the Government intends to do. We’ve really had to dig for any detail. However, as companies can claim VAT back, I can only think that this is a cashflow issue for the Government. All it means is an extra link in the chain for us,” he says.

West’s argument on this issue is more to the point: “This is a Government that is trying to encourage productivity, as the UK has the lowest productivity level in Europe. If we can’t motivate and incentivise staff, how are we going to achieve this?”

Easy targets?

There is a general feeling that the Government is hitting easy targets, and the voucher industry feels particularly aggrieved as the raison d’être of its business is to encourage people to work harder.

But really the voucher industry has very little to complain about. Not many sectors are recording strong growth that shows little sign of slowing down.

The voucher business is currently benefiting from two trends. West says: “In the UK, we have a very strong retail market, particularly as brands are nationwide. And even since September 11, this has not diminished.” Usually voucher sales follow retail sales – if retail is doing well, so do vouchers.

The second trend is the increase, not only in those companies seeking to motivate staff, but also in the types of staff that are being motivated.

West continues: “Every type of company buys vouchers, from the local tombola stall to the business running a high-powered incentive scheme for top employees.” But what used to be a programme mainly for sales staff is now spreading throughout corporations.

Povey adds: “The whole area of motivation is getting bigger. Many of the reward and recognition programmes we run now are for back-room staff, which could mean thousands of people in one company. This is becoming more the norm. A lot of the rewards are small – but that is where we are finding our business growth.”

By the end of this year, the voucher industry will know exactly what the implications of the VAT ruling will be. Despite the ability to claim back VAT, it will, as Lucius believes, provide another unnecessary link in the business chain. But it is unlikely that the industry is going to complain too loudly for too long. Just for the moment, business is far too good.