From 1 March 2019, HMRC has changed its VAT treatment on forfeited deposits. This could potentially affect a wide range of businesses who retain payments and deposits for goods or services which a customer does not ultimately take up.
The new policy is that VAT remains due on a deposit even if the customer does not use the goods or services for which it was paid. HMRC previously allowed businesses to reclaim the VAT accounted for on a deposit where the customer, in the end, did not use the service or collect the goods.
The change was triggered by recent decisions made by the Court of Justice of the European Union that went against the current policy. HMRC have therefore changed their guidance and published Revenue and Customs Brief 13 (2018), setting out its new policy.
For businesses that have previously applied a policy of reclaiming VAT on forfeited deposits, they can continue with this treatment for cancellations received before 1 March 2019, but after that date, an adjustment to output VAT will no longer be permissible unless the deposit is returned to the customer.
A hotel room is booked on 5 January 2019 for a 1 night stay on 30 March 2019. The price of the room is £100 plus VAT and the customer pays a non-refundable deposit of £50 plus VAT.
Output VAT of £10 is initially accounted for on the deposit as part payment of the supply of the room.
If the customer cancels the booking before 1 March 2019, the hotel can make an adjustment to treat the £10 VAT as outside the scope and so recovers the £10 VAT on their VAT return for the period of the cancellation.
If the customer cancels the booking after 1 March 2019, the hotel cannot make an adjustment and the VAT of £10 remains due.
If you have historically adjusted your VAT return for forfeited deposits, you will need to alter your systems so that there is no adjustment after 1 March 2019, unless the deposit is returned to the customer.
If you have not previously made an adjustment to VAT when a cancellation is received then you do not need to change your systems. HMRC have stated that these businesses cannot make any adjustment to previous VAT periods based on the former policy as they believe the new policy has always been the correct interpretation of the law.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.