February 11th, 2019

What is the VAT treatment on deposits I keep?

HMRC are changing the VAT treatment of deposits retained by businesses.

At present, VAT collected on unfulfilled supplies (non-refundable deposits for goods/ services paid for but not used by the customer) can be kept by the business and not paid across to HMRC. This is because it is considered a form of compensation for the business, and as such, outside the scope of VAT.

This will no longer be the case from 1 March 2019, in that VAT will be due on deposits and retained payments where there is an unfulfilled supply.

The aim of HMRC is to bring consistency of VAT treatment on all payments for goods and services where there is an unfulfilled supply. HMRC advises that:

When a full or part payment is made on account for a 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 the payment is refunded. This is because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.

This measure will mostly impact on the hospitality sector, however any business that retains payments/ deposits will also be affected (e.g. wedding photographers).

Where it is recognised relevant goods or services will not be used or received before 1 March 2019, the existing policy can be applied.

HMRC provide an example of this:

A hotel room is booked on 4 January 2019 for a one night stay on 17 March 2019. The price is £100 plus £20 VAT. The hotel takes payment at the time of booking. The customer has no entitlement to a refund in the event of them cancelling or not using the room.

The hotel must account for the VAT when the payment is first made.

If the customer cancels the booking before 1 March 2019, the hotel may make an adjustment and treat the £20 VAT as outside the scope of VAT.

If the customer cancels on or after 1 March 2019 or does not use the room, the hotel cannot adjust the £20 VAT as the new policy will apply.

If you need any help with this then please don’t hesitate to get in touch.

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Filed under

Freelancers HMRC Limited Companies Photographers VAT

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Client Manager

Sarah manages a variety of clients, including wedding photographers and writers, and specialises in personal tax. After studying History & Politics at the University of Warwick, Sarah trained as a chartered accountant at an independent firm in St Helens before becoming Tax Manager. Sarah is responsible for training and mentoring junior staff.

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