There seems to be quite a bit of confusion and uncertainty about the VAT treatment of deposits.
For example, a wedding photographer might get paid a deposit of £600 for a wedding they’re doing next year.
So, when does it count for VAT? The bad news is that it’s on receipt. And that means that if you’re carefully staying under the VAT threshold by ignoring deposits then you’ll need to do your sums again.
And why is there so much confusion? My guess is that it’s due to the differences between the ‘accounting treatment’ and the ‘VAT treatment’. For your accounts it might be appropriate to only recognise the income from deposits when you do the work. But VAT is very different. The rules say that it counts as a supply when you get the deposit. And that’s that.
And the good news?
Well, if you’re registered for VAT you don’t need to pay the VAT on forfeited deposits.
(The technical reason for this is that VAT is only due on a supply. A forfeited deposit isn’t a supply of anything. It’s compensation – so it’s not VAT’able.)
Say you’ve received a deposit of £600 – ie £500 plus VAT of £100 then you will have paid VAT over when you received the deposit. If the customer then cancels you can make an adjustment on your next VAT return so you get the VAT back again.
If you need any help with this then please don’t hesitate to get in touch.
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