WHAT HAS CHANGED?
HMRC has changed its approach to VAT on deposits. The change affects situations where a deposit has been paid, but not the actual supply required, i.e. a customer pays a supplier the required deposit and then does not require the service thereafter, through perhaps a cancellation or “no show”.
Up until March 2019, suppliers who retained deposits in these situations were not obliged to pay VAT on the amount retained. In these circumstances, the supplier would usually forecast the VAT payable and charge this on the deposit invoice (e.g. in securing the room at a hotel, or table at a restaurant), but if there was a no show could then pocket the VAT charged and not pay it to HMRC.
This practice of non-returnable deposits to secure a booking is not only prevalent in the hospitality industry, but also in travel and prestige goods. HMRC originally thought that as the actual supply had not taken place and importantly as VAT is a tax on consumption, nothing had been consumed, no VAT applies.ii
However, cases in the European Courts of Justice (ECJ), which are binding on the UK for the time being, ruled otherwise. These challenge the previous thinking, in that if a customer pays a deposit, to secure a reservation then despite not receiving the intended supply, the customer has received something akin to a “right of reservation”.
The VAT treatment of deposits has always depended on what the deposit is for. Deposits or prepayments will either be a PART PAYMENT of goods and services or a SECURITY DEPOSIT just in case of future damages.
The VAT treatment is different for each case.
If the deposit is for part payment of goods/services then VAT should be applied at the point of receipt
You may ask your customers to pay a deposit when they hire goods from you. You don’t have to account for VAT if the deposit is either:
1. refunded in full to the customer when they return the goods safely
2. kept by you to compensate you for loss or damage
One of the lead cases was Air France. Passengers paid to reserve flights on which they did not travel. Air France argued that if the customers did not fly, then no supply had been made and no VAT due. The ECJ disagreed and the deposits should have been taxed.
WHEN DID THE CHANGE TAKE PLACE?
According to HMRC, from 1st March 2019 they expected suppliers to account for VAT on any deposit received regardless of whether the intended supply occurs. This however is not actually the true impact of the ECJ cases: The Judges have declared that such deposits were always taxable, not that they were taxable from March 2019. Given the binding nature of the ECJ judgment, the VAT policy adopted in the UK has therefore always been wrong (up until March 19 that is). We return to the point at the end of this article.
WHAT HAS NOT CHANGED?
Where deposits are received and the supply takes place as intended, there is no change. These are taxable and always have been.
Where deposits are returned to the customer, then no VAT is due (and any VAT originally accounted for on receipt of the deposits can be reversed upon repayment to the customer).
There are also other deposits which do not fall within this, e.g. Security deposits. These are often when a payment is taken in consideration for a potential situation in lieu of there being insurance to cover the eventuality. A common one is for the return of a rental vehicle without damage and a full tank of fuel. On these no VAT is due regardless of whether the deposit is retained or returned. These deposits are not made to secure a reservation so do not fall within the new tax treatment.
Where suppliers make zero rated (such as some forms of transport) services then the deposit retains its zero-rated treatment (despite the HMRC Business Brief not acknowledging this