Accounting for gift vouchers and breakage

Money received for a gift voucher is not revenue when it is received. Under FRS 102 it is a contract liability until the voucher is redeemed, and revenue is recognised as the goods or services are supplied. Some vouchers are never used; that unused amount, called breakage, is released to revenue either in proportion to redemptions, if the business can reliably expect it, or when the chance of the customer using the voucher becomes remote.

Why is a voucher sale a liability rather than a sale?

When a customer pays £50 for a voucher, the business has not yet supplied anything. It owes the holder £50 of goods or services. Paragraph 23.129 of FRS 102 says that when an entity receives an upfront non refundable payment that gives the customer a right to receive a good or service in the future, giving a gift card as the example, this gives rise to a contract liability. Paragraph 23.125 defines a contract liability as an entity’s obligation to transfer goods or services to a customer for which it has received consideration, and requires it to be derecognised and revenue recognised as those goods or services are transferred.

These rules come from the revised Section 23, introduced by the Periodic Review 2024 amendments and applying, under paragraph 1.37, to accounting periods beginning on or after 1 January 2026. Paragraph 23.128 allows other descriptions on the balance sheet, so many businesses will keep calling it deferred income or vouchers in issue. The general principles of income received in advance are covered on the deferred income page; this page deals with what is specific to vouchers.

What is breakage?

Paragraph 23.129 recognises that customers might not exercise all of their contractual rights and says those unexercised rights are often referred to as breakage. Lost vouchers, gift cards that expire, small balances left on a card and vouchers received by people who never visit the shop all produce breakage. For a retailer, restaurant or salon selling a large volume of vouchers, it can be a material amount of income.

The difficulty is timing. The business does not know which individual vouchers will go unused, but it may know from experience roughly what proportion of a batch will.

When can breakage be recognised as revenue?

Paragraph 23.130 gives two routes, and the choice between them is not optional. It turns on whether the business expects to be entitled to a breakage amount, judged against the constraint on variable consideration in paragraph 23.46.

• Expected breakage (the proportional method): if the entity expects to be entitled to breakage, it recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by customers.
• No reliable expectation (the remote method): if it does not expect to be entitled to breakage, it recognises the breakage as revenue only when the likelihood of the customer exercising its remaining rights becomes remote, typically at or after expiry.

Paragraph 23.46 only allows variable consideration to be included to the extent that it is highly probable that the entity will be entitled to the cumulative revenue recognised once the uncertainty is resolved. In practice that means a reliable history of redemption rates for similar vouchers. A business with a new voucher scheme, a change in terms or very volatile redemption patterns will normally have to use the remote method until it has the data. Under paragraph 23.47 the estimate must be updated at each reporting date.

How does the proportional method work with numbers?

Illustration only. A restaurant sells £20,000 of vouchers in its first quarter. Its records over several years show that 10% of voucher value is never redeemed, and it concludes that this rate is highly probable. It therefore expects £18,000 to be redeemed and £2,000 of breakage.

Step	Calculation	Amount
Vouchers sold	Credit contract liability	£20,000
Redeemed by year end	Meals supplied	£9,000
Proportion of expected redemptions	£9,000 / £18,000	50%
Breakage released	50% x £2,000	£1,000
Revenue recognised	£9,000 + £1,000	£10,000
Contract liability at year end	£20,000 less £10,000	£10,000

The closing liability of £10,000 covers the £9,000 still expected to be redeemed plus £1,000 of breakage not yet released. VAT is ignored here; see below. Under the remote method the same restaurant would recognise only £9,000 of revenue and carry an £11,000 liability until the unredeemed vouchers expire or redemption becomes remote.

How does VAT affect the bookkeeping?

The VAT treatment depends on the type of voucher, and it changes what goes into the liability. HMRC’s VAT Information Sheet 09/18 explains the rules that have applied since 1 January 2019 under Schedule 10B of the VAT Act 1994:

• Single purpose voucher: one where the place of supply of the underlying goods or services and their VAT liability are known when it is issued. VAT is due when the voucher is issued (and on each later transfer), not on redemption. The issuer credits output VAT at the point of sale and the contract liability is the net amount.
• Multi purpose voucher: any voucher that is not a single purpose voucher, such as one that can be spent on both standard rated and zero rated goods. The consideration on issue is disregarded and VAT is accounted for by the redeemer when the voucher is used. The liability is held gross and VAT is posted on redemption.

The consequence for breakage is that a multi purpose voucher that is never redeemed never bears VAT, so the full amount released is income. For a single purpose voucher the VAT has already been paid at issue and only the net amount is released. Gift vouchers sold through third party platforms raise the separate question of whether the business is principal or agent.

Does breakage affect Corporation Tax?

Section 46 of the Corporation Tax Act 2009 requires the profits of a trade to be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. There is no specific statutory override for voucher breakage, so the timing of breakage income in properly prepared accounts will generally set the timing for tax. A change from releasing breakage on expiry to the proportional method can therefore accelerate taxable profit, and the basis for the estimate should be documented in case HMRC asks how it was set.

What records does a voucher scheme need?

• A voucher register with issue date, value, expiry date, VAT type and redemption status for each voucher or card.
• Historical redemption data by batch or period, kept consistently enough to support a highly probable estimate.
• A monthly reconciliation of the register to the contract liability control account.
• A note of the voucher terms, including any expiry and any refund rights, because a refundable payment is not the same as the non refundable payment described in paragraph 23.129.

What mistakes come up most often?

• Crediting voucher sales straight to sales, which overstates revenue in the period of sale, often in December.
• Never releasing expired vouchers, so the liability grows year after year.
• Using an assumed breakage rate with no history to support it.
• Charging VAT at issue on multi purpose vouchers, or failing to charge it at issue on single purpose vouchers.
• Confusing customer vouchers with vouchers bought as staff gifts, which are a cost to the employer with their own tax rules; see gift vouchers and cash gifts to staff.

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Related Accountapedia entries

• Accounting for customer loyalty schemes
• VAT on vouchers: single and multi purpose
• Sale or return and customer rights of return
• Variable consideration: rebates, discounts and bonuses
• Turnover recognition under FRS 105

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• GOV.UK: Find out about changes to vat legislation on face value vouchers vat i
• legislation.gov.uk: Act 2009 c. 4, section 46

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.