HMRC has announced a change in the VAT treatment of deposits which are retained when a potential customer does not use the services or collect the goods, forfeiting their deposit. This change will affect any business which accepts deposits, in particular the hospitality industry.
At present, when a customer, for whatever reason does not end up making use of the service or collecting the goods, VAT does not have to be accounted for and an adjustment can be made to the VAT return in which the deposit is forfeited to ‘reclaim’ the VAT from HMRC.
This is common in the hotel industry where for example, a guest does not turn up for their room booking having paid a deposit. Currently, the deposit can be treated as outside the scope of VAT. However, following a European court case, the treatment is being revised by HMRC.
What is changing and how will this affect my business?
From 1 March 2019, if the supply does not take place and the deposit is forfeited, it will no longer be possible to reduce the VAT payable to HMRC, unless the deposit is actually refunded. In the example of the hotel booking, this means that VAT will remain chargeable on the deposit despite the guest not turning up to use the room they have reserved. For deposits taken prior to 1 March 2019, the current treatment can continue, as long as the taxpayer has always made adjustments to VAT payable for unfulfilled supplies.
It is important to note that if the taxpayer has never made adjustments to reduce the VAT payable on unfulfilled deposits, adjustments cannot now be made for previous periods, as HMRC claims that ‘the past treatment has been correct’.
In addition to this, HMRC has also clarified the time at which VAT should be paid to HMRC relating to credit cards. VAT is not payable where credit card details are taken but no payment is taken; VAT is only due when the payment is actually taken.
If you have any queries following the announcement of this change, please get in touch with our experts in the VAT team who will be happy to assist.