With effect from 1 March 2019, HMRC’s new policy in relation to retained (or non-refundable) deposits came into force.
Previously HMRC’s policy allowed for deposit payments to be treated as outside the scope of VAT where the customer did not use the service which had been booked – such as a payment of a deposit for an unfulfilled hotel room booking. This VAT treatment was on the basis that there was effectively nothing supplied in return for the payment (and was based on the decision of the European court in Societe Thermale d’Eugenie-les-Bains).
However, following recent European case law (in Air-France/KLM), HMRC have changed their policy and are now taking the stance that these payments do relate to a supply made, and should therefore be treated as subject to VAT. This is on the basis that the supply cannot be re-characterised from the supply which it was originally intended to be.
Unusually, although stating that their policy has changed, HMRC have also stated that no repayments will be made for businesses which did not correctly apply the previous policy - since their view is that the current policy has always been the correct position. Therefore, if businesses now feel that they did not correctly benefit from the previous policy, HMRC will not accept that they can now recover the VAT which has been accounted for.
Both the previous and new policies have been based on European caselaw and it is not yet clear how these two areas of the caselaw will be reconciled. Accordingly, it is possible that HMRC’s current position will be challenged in the courts. It may therefore be worth tracking the VAT which has been accounted for on these payments under the new policy whilst businesses wait to see whether this happens.
This will affect any businesses which collect non-refundable deposits – with the key areas affected being the hotel, restaurant and leisure sectors. HMRC have updated their Public Notice on hotels and holiday accommodation (709/3) to reflect this change.
Businesses which think they may be affected should review the deposits taken, and the terms and conditions under which they are collected and retained to determine whether the amounts fall within the scope of this new policy.