All non-refunded deposits to fall within scope of VAT from March

9th January 2019

From 1st March 2019, HMRC is changing the way VAT is accounted for when deposits are paid but the supply is not fulfilled. Instead of seeing retained deposits as compensation for a supplier when the potential customer pulls out of the transaction, these will now be accounted for in the same way as other services, with VAT payable.

Following recent European Court cases involving Air France-KLM and Firin OOD, HMRC has reviewed its current VAT treatment of payments received for supplies that never take place, such as when a deposit is paid for a hotel room, which the customer subsequently cancels.

Currently, where a payment is made in advance of a supply, but the supply is unfulfilled and the deposit is retained by the supplier, the company in question has been able to treat this income as outside the scope of VAT, therefore retaining the 20% VAT paid by the customer. 

However, with effect from 1st March 2019, when a full or part payment is made on account for a future taxable supply, a chargeable event occurs and VAT becomes due on the amount paid. If the supply does not take place, the VAT must not be reduced, unless that payment is refunded to the customer.  These payments will still be seen as payment for supply and cannot be reclassified. 

Where deposits have been taken prior to 1 March 2019 and the VAT accounted for on the deposit received but the customer cancels the supply after that date, the new rules will still apply and VAT will be payable.

If you would like further information about this change, please contact Jessica Mason, VAT Consultant, Harrison Beale and Owen Limited.