VAT AND Deposits Where Is The Tax Point?

id : 105 Value Added Tax   
posted by : Admin
 DOQ : 2020-06-07 06:09:11

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”.

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