Retained payments and deposits: how the VAT treatment is changing
Revenue and Customs Brief (RCB) 13 (2018) introduces HMRC’s revised policy in determining that VAT is due on all retained payments for unused services and uncollected goods. Previously, HMRC’s policy was to allow businesses to treat payments for services and part payments for goods as “Outside the Scope of VAT” where the customer did not either:
- use the service; or
- collect the goods.
Accordingly, a business such as an hotel was able to reverse the VAT treatment and be entitled to a refund of the VAT previously accounted for, in respect of certain non-refundable deposits.
HMRC’s revised policy on this matter is that such treatment is no longer possible with effect from 1 March 2019.
In 2009, the judgment of the Court of Justice of the European Union (CJEU) in Société thermale d’Eugénie-les-Bains (Case C-277/05), found that where deposits were retained following a “no-show” at the hotel, the supply should be regarded as compensatory. The supply was reclassified from being a “VATable” supply to an Outside the Scope (OTS) supply. This was only applicable to normal reservations as opposed to “guaranteed reservations”. This treatment was also applied by HMRC to supplies of goods where only part payment had been made.
HMRC’s new policy
HMRC’s new policy, as a result of more recent judgements of the CJEU in cases such as in Air France-KLM and another , advises businesses that VAT must be accounted for on all payments for goods and services which customers pay for but do not collect or use.
HMRC’s VAT treatment from 1 March 2019
As a result of this change in policy by HMRC, where an advance payment or part payment is made by a customer, the business accounts for VAT in the same way as under the current rules. However, if that supply is subsequently unfulfilled, the business is no longer able to make a VAT adjustment and reduce the value of VAT which he has accounted for. VAT continues to be due by the supplier regardless of whether the goods or services are collected or used.
One further point made in the RCB is that where a business has nottreated supplies pre-28 February 2019 as OTS supplies, it is not now able to make any adjustments to its VAT accounting as “… no error has been made” (per HMRC’s RCB).
This will create an inequality in tax treatment due to certain businesses having enjoyed a VAT windfall in prior VAT periods as compared to a similar business which may have not. However, it remains to be seen whether this matter, as to HMRC’s revised treatment, might be challenged in the courts.
Who is potentially affected?
This RCB is relevant for any businesses that receive deposits, including:
- Goods hire
In light of possible challenges in the future, our VAT specialists would be pleased to offer advice should you have any similar claims which may be made against HMRC and which may be capped as going back a number of years.