Deposits & Penalty Charges - VAT implications

Les Howard
VAT Consultant
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The Tribunal and higher Courts have heard a number of cases over the years concerning the application of VAT (or not) to deposits and penalty charges. A couple of recent cases highlight the issues.

The UK Privy Council decided a case involving returnable deposits, which customers paid for gas containers. This is a common scenario, where customers purchase gas in portable gas containers. When one is empty, they purchase a full one, and pay for the gas. The containers remain the property of the supplying company. The sums of money held appeared in the company’s Balance Sheet. For many years the company did not pay VAT (or tax) on the deposits. An apparent change of practice by HMRC led to an assessment and penalties. On Appeal, the Court held that there was no supply for the service of the loan of the gas containers. The deposits were properly security deposits, and were returnable. They also served as an incentive for customers to return the containers to the supplying company. The Court allowed the company’s Appeal.

          [Total Mauritius Ltd v Mauritius Revenue Authority [2011] UPKC 39.]

In another case, a Sports Club collected its membership fees monthly. When a customer’s payments stopped, and an outside agency was appointed to secure the outstanding amount, the Club argued that any money received was not vatable, since the customer was not paying for access to the Club, his/her membership having been suspended. Surprisingly, the Tribunal found in favour of the taxpayer. The argument was that, since the ‘member’ was not taking advantage of the Club’s facilities, since access was denied, the payments must be treated as compensation, which is outside the scope of VAT. [I would have said that money recovered as a debt must remain taxable!]

[Esporta Ltd v HMRC [2011] UKFTT 633.]

Whilst this case is likely to be appealed, it remains true that compensation and penalty payments are outside the scope of VAT. Security deposits are also outside the scope of VAT. Many businesses operate deposit schemes, and may find themselves paying VAT unnecessarily.

About Les Howard


Hi, I am a VAT Consultant, working mainly with charities. I am based in Cambridgeshire

I have over 20 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.


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