You sold £4,000 of Shopify gift cards in December. Your dashboard shows the cash, your accountant says it's not all revenue yet, and you're not sure whether VAT was due when you sold the card or when the customer spends it. That confusion is normal, and getting it wrong distorts both your profit and your VAT return.
Here's the short version. A gift card you sell is usually a liability, not income, until the customer redeems it. And whether VAT is due at sale or at redemption depends on one technical test: is the card a single-purpose voucher or a multi-purpose voucher?
This guide walks through both the bookkeeping (deferred revenue and breakage) and the VAT, with an illustrative worked example using current rates. It's written for UK Shopify sellers and the SMBs behind them. If you'd rather hand the whole thing over, our team supports Shopify sellers with exactly this.
Is a Shopify gift card sale revenue or deferred revenue?
When you sell a gift card you've usually received cash but not yet delivered anything, so the sale is deferred revenue (a liability), and you only recognise it as income when the card is redeemed for goods.
The logic is simple once you see it. Selling a gift card is a promise to supply goods later. You've taken the money, but you still owe the customer something. Under UK GAAP that obligation sits on your balance sheet as a liability, often labelled "deferred income" or "gift card liability", until you actually hand over the product.
That matters because your Shopify reports will happily show the gift card sale alongside ordinary orders. If you book all of it as turnover on the day of sale, you overstate revenue, overstate profit, and potentially pay tax early on income you haven't earned yet.
How do you record gift cards in your books?
There are three moments to get right: selling the card, redeeming it, and dealing with the ones that are never used.
1. When you sell the card. Cash (or your Shopify Payments clearing account) goes up, and you credit a gift card liability account. No revenue yet.
2. When the customer redeems it. You release the liability and recognise revenue for the goods supplied. At this point VAT is normally accounted for too (more on timing below).
3. When a card expires unused or is genuinely never going to be redeemed. The leftover liability can be released to income. That release is called breakage, and it has its own rules.
In practice, the mistake we most often see with Shopify stores is treating the December cash spike as profit. A clean monthly routine, reconciling the gift card liability balance to Shopify's outstanding gift card report, keeps your management accounts honest and makes year-end far cheaper.
When is VAT due on a gift card: at sale or at redemption?
It depends on the type of voucher. For a single-purpose voucher VAT is due when the card is issued and on each transfer. For a multi-purpose voucher the issue and transfer are disregarded for VAT, and VAT is due only when the card is redeemed.
These rules apply to vouchers issued on or after 1 January 2019 and are set out in HMRC's Business promotions (VAT Notice 700/7), section 9, with the underlying law in Schedule 10B of the VAT Act 1994. A "gift card" or e-gift card on Shopify is a face-value voucher for these purposes.
Two definitions do all the work here.
- A single-purpose voucher (SPV) is one where, at the time of issue, both the place of supply and the VAT liability (the rate) of the underlying goods or services are known. VAT is due when it's issued.
- A multi-purpose voucher (MPV) is any voucher that is not an SPV. The consideration for issuing or transferring it is disregarded at every stage, so VAT falls due only on redemption.
For an MPV, HMRC's VAT information sheet 09/18 confirms the value on which VAT is due is the amount charged for the most recent transfer of the voucher, where the redeemer knows it, or the face value if that figure isn't known.
Single-purpose vs multi-purpose: which is your Shopify gift card?
This is the part Shopify sellers get wrong most often. The answer turns on what your store actually sells.
| Your store sells... | Voucher type | VAT due when... |
|---|---|---|
| Only standard-rated goods, all delivered in the UK | Single-purpose voucher (SPV) | The card is sold (issued) |
| A mix of VAT rates (for example standard-rated homeware plus zero-rated children's clothes or books) | Multi-purpose voucher (MPV) | The card is redeemed |
| Goods where the place of supply could change (for example UK and overseas fulfilment) | Multi-purpose voucher (MPV) | The card is redeemed |
If everything in your shop is standard-rated at the UK 20% rate, your gift card is almost certainly an SPV, and VAT is due on the value of the card when you sell it. The standard rate is 20% per HMRC's VAT rates.
If you sell a mix of VAT liabilities, so the customer could spend the card on either standard-rated or zero-rated items, you can't know the VAT rate at the point of issue. That makes it a multi-purpose voucher, and VAT waits until redemption.
One practical knock-on: for an SPV, the cash you take on the gift card sale already includes VAT, even though no goods have moved. For an MPV, the deferred income on your balance sheet is gross, and the VAT crystallises later when the card is spent. Getting the classification right keeps your VAT return boxes correct. If you're not VAT registered yet, note the registration threshold is £90,000 of taxable turnover (current, from 1 April 2024) per HMRC's VAT registration thresholds, and gift card sales can count towards that test depending on type.
What is breakage and how do you account for it?
Breakage is the value of gift cards that customers never redeem. Because an unredeemed card stays a liability forever otherwise, accounting standards let you release that value to income, but only on a sound basis.
Two approaches exist under current UK GAAP:
- Estimate it. If you have enough history to reliably estimate the proportion of cards that won't be redeemed, you can recognise that breakage as revenue in line with redemptions over time.
- Wait until redemption is remote. If you can't reliably estimate, you release the unredeemed balance only when the likelihood of the customer redeeming becomes remote, for example after the card expires under your terms.
A word of caution. If your terms and conditions let customers redeem indefinitely, or you'd refund on request, HMRC and your auditor may challenge an early breakage release. Keep clear, written gift card terms (expiry, no-refund) so the basis for breakage is defensible. And remember the VAT point: for an SPV you already accounted for VAT at issue, so breakage is a clean release to income; for an MPV that's never redeemed, no supply happens, so the disregarded consideration generally doesn't attract VAT.
Illustrative example: a year of Shopify gift cards
Illustrative example. Meridian Homeware is a fictional UK Shopify store. Everything it sells is standard-rated homeware delivered within the UK, so its gift cards are single-purpose vouchers. It is VAT registered and uses the standard rate of 20%.
During its year it sells £12,000 (face value) of gift cards. By the year-end, customers have redeemed £9,000 of them. £3,000 remains outstanding, and based on three years of history Meridian reliably expects 10% of cards to never be redeemed.
Because these are SPVs, VAT is due when the cards are sold. The £12,000 of sales is VAT-inclusive, so:
- Net (ex-VAT) value of cards sold: £12,000 / 1.2 = £10,000
- Output VAT due at issue: £12,000 - £10,000 = £2,000
That £2,000 goes in the VAT return for the period the cards were sold, not when they're spent. In box terms, the net £10,000 sits in Box 6 (total value of sales excluding VAT) and the £2,000 output tax in Box 1 (VAT due on sales), at issue.
For the income statement, revenue is recognised as cards are redeemed plus reliable breakage:
- Redeemed in year (ex-VAT): £9,000 / 1.2 = £7,500 recognised as revenue
- Estimated breakage on the £12,000 face value at 10%: £1,200 face, which is £1,000 ex-VAT, recognised in line with redemptions
- Remaining deferred income carried forward relates to cards still expected to be redeemed
The key takeaway: the VAT (£2,000) was settled up front because these are SPVs, while the revenue recognition still follows redemption and a defensible breakage estimate. Those two timings are not the same, and your books need to reflect both.
If your store instead sold a mix of VAT rates, the cards would be MPVs, no VAT would have been due on the £12,000 at sale, and the £2,000 would only crystallise as customers redeemed against standard-rated items.
What changes under FRS 102 for periods from 2026?
The core idea stays the same: gift card cash is deferred until you perform. What changes is the framework. For accounting periods beginning on or after 1 January 2026, the revised Section 23 of FRS 102 introduces a five-step revenue model based on the principles of IFRS 15, replacing the old risks-and-rewards approach.
Under the new model you identify the performance obligation (supplying goods when the card is redeemed) and recognise revenue when you satisfy it, which for a gift card is still on redemption. Consideration received in advance, your gift card cash, is recognised as a contract liability until then.
The practical upshot for most small Shopify stores is modest: the deferred-then-recognise pattern is unchanged. But the new standard is more prescriptive about breakage and disclosure, so it's worth a review of your gift card policy before your first 2026 accounting period. This is an enacted standard change, not a Budget proposal, and the timing is confirmed by the FRC and summarised by the ICAEW's revenue recognition guidance.
Want to make sure your gift card accounting is clean before year-end? Book a free 20-minute call with a Zmartly accountant who works with Shopify sellers every day.
Frequently asked questions
Is selling a Shopify gift card taxable income straight away?
Not usually. The cash you receive is deferred revenue (a liability) until the card is redeemed for goods. You recognise income as customers spend their cards, plus a defensible breakage estimate for those that won't be redeemed.
Do I charge VAT when I sell a gift card or when it's used?
It depends on the voucher type. For a single-purpose voucher (one VAT rate, one place of supply known at issue) VAT is due when you sell the card. For a multi-purpose voucher VAT is due only when the card is redeemed, under VAT Notice 700/7.
How do I know if my Shopify gift card is single-purpose or multi-purpose?
If everything in your store is the same VAT rate (typically standard-rated 20%) and delivered in the UK, it's a single-purpose voucher. If a customer could spend the card across different VAT rates or different places of supply, it's a multi-purpose voucher.
What happens to gift cards that are never redeemed?
The unredeemed value is called breakage. You can release it to income, either by reliable estimate over time or once redemption becomes remote (for example after expiry under clear written terms). For a single-purpose voucher VAT was already accounted for at issue; for an unredeemed multi-purpose voucher no supply happens, so VAT generally doesn't arise.
Does the value of gift cards count towards the VAT registration threshold?
It can. The VAT registration threshold is £90,000 of taxable turnover (current, from 1 April 2024). Whether and when a gift card counts depends on whether it's a single-purpose or multi-purpose voucher, so check the classification before you assume you're under the limit.
