15 May 2019
In Budget 2018, the chancellor announced changes to the VAT treatment of what he called ‘unfulfilled supplies’. At the time, the scope and nature of this change wasn’t clear. However, subsequent announcements have confirmed that since 1 March 2019 (despite conflicting European court case precedent) HMRC will adopt a new policy in relation to VAT on retained (or non-refundable) deposits.
Since 2009 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 is broadly consistent with the treatment of other damages payments; it relies on the fact that when a deposit is retained but nothing is supplied it cannot be subject to VAT (based on the decision of the European court in Societe Thermale d’Eugenie-les-Bains).
However more recent European case law (in Air-France/KLM) has prompted HMRC to change its policy and it is now arguing that these payments do relate to a supply made, and should therefore be treated as being 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.
What are the changes?
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 case law and it is not yet clear how these two areas of the case law will be reconciled. For that reason, 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.
Who will the changes affect?
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.