Ross McConnell - Kinross Based Chartered Accountant

Non-Refundable Deposits Are Now Subject To VAT

by ROSS MCCONNELL on FEBRUARY 27, 2019

How Will This Impact UK Businesses In 2019

This week’s advice is for anyone who takes a non-refundable deposit. The change to VAT regulations that takes effect on 1 March 2019 will impact you. 

It regards the VAT position on deposits and pre- or staged payments where the original order goes unfulfilled if you, as the supplier/provider, have agreement to retain the deposit or down payment. This could apply to anything from a down payment on an order of goods to a deposit for a hotel room. 

It was estimated in the 2018 budget that this change could raise £425 million in additional VAT receipts each year… so it’s obviously going to impact on a broad range of businesses, but especially accommodation providers.  

Let’s look at the detail, set out in HMRC’s Business Brief 13 /18, published on 21 December 2018.

The position up to 28 February
If you charge a deposit and it is agreed by both parties that this is non refundable – referred to by HMRC as a ‘forfeited deposit’ – then you must charge VAT and account for the VAT charged in your first quarterly return thereafter.

If the supply then goes unfulfilled for any reason, then your business could previously reclassify the ‘deposit’ as compensation for the lost sale. Compensation was exempt from VAT, which meant the business could reclaim the VAT paid in its next return. 

What’s the position from 1 March 2019?
For any initial invoice issued after 1 March 2019, the adjustment for forfeited deposits is no longer possible. Now, you as the supplying business still charge VAT on the deposit but you cannot make a VAT adjustment if the order is cancelled. This is the case even if the deposit was paid before 1 March.

An HMRC example is for a hotelier who takes part payment on 4 January 2019 to reserve a room for one-night on 17 March 2019. The non-refundable deposit charged on 4 January was £100 plus £20 VAT.

The hotel accounted for the £20 VAT charged in its VAT return for the period including 4 January.

If the customer cancelled before 1 March 2019, the hotel can treat the £20 VAT paid as compensation for the cancelled booking and make an adjustment in its next return, as compensation is outside the scope of VAT. 

But if the customer cancels on or after 1 March 2019, or does not use the room on the night of 17 March for any reason, then the new policy will apply, and the hotel cannot adjust the £20 VAT paid to HMRC.

Credit cards
If the room was reserved using a credit card’s details, but no payment is to be taken until the guest is due to stay, then VAT is only due when the payment is actually taken, ie 17 March. 

In this instance, as no VAT has actually been charged before 1 March, the payment cannot be reclassified if the supply is unfulfilled.

Retrospective action
You can adjust previous VAT periods to treat supplies in line with the policy as it stood up to 28 February 2019 if you have previously treated payments for unfulfilled supplies as compensation. But if you did not treat payments as compensation then you have applied the law correctly as it now stands, and no retrospective adjustment can be claimed as no error was made under current law.

As always, we’re here to keep you right. Call us on 01577 865885 if you have any questions about this new rule.

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