Change to the VAT treatment of retained payments and deposits

Published by Rupert Moyle on 25 January 2019

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We outline HMRC’s new policy on VAT and payments for unfulfilled supplies which applies from 1 March 2019.

Who is this relevant to?

This issue is relevant to businesses which currently take payments that are retained in the event of no shows or cancellation.

What is the issue?

Currently where a business takes a deposit for goods or services which customers do not take up or cancel and the business retains the payment, the retained payment can be treated as outside the scope of VAT on the basis that it represents compensation for the loss suffered as a result of the cancellation. If VAT has been accounted for an adjustment can be made and the VAT claimed back from HMRC.

For example, if a hotel booking is made for £100 plus VAT of £20, at the time of booking the VAT is passed to HMRC. If the customer cancels or just doesn’t turn up, a refund of the VAT accounted for on receipt of the deposit can be obtained from HMRC after the time of the expected supply. This policy, applied by HMRC, was based on a decision of the European Court of Justice (CJEU) in the Societe thermale d’Eugenie-les-Bains case, in 2007.

Following two more recent CJEU decisions – Air France and Firin OOD – HMRC has decided to change its policy. In Air France in particular, which concerned the retention of airfares paid in the event of no shows, the court decided that the payment by the customer was in respect of the right to take a flight which was available to them up to the moment that the gates closed for the flight in question. In addition, the amount paid was the full consideration for the flight and was not refundable and, as such, the money paid was consideration (for the right) and was not compensation.

On the back of this HMRC have announced that from 1 March 2019 VAT is due on all retained payments for unused services and uncollected goods and no adjustment can be made.

HMRC issued a business brief in December 2018 advising of this change, click here to view.

It should be stressed that, if the payment is refunded to the customer, the consideration is reduced and the VAT can be adjusted in the normal way.

What should you do?

If you currently take payments which are retained in the event of no shows or cancellation you may need to review your processes. If you have not as yet claimed back VAT for retained deposits there may still be an opportunity to make a claim now, for the four years to 31 March 2019.

If you have any concerns about your VAT treatment of cancellation fees or retained payments please speak with your usual Kreston Reeves adviser here or get in touch with members of our specialist VAT team Rupert Moyle here or Colin Laidlaw here or on +44 (0)330 124 1399.

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