VAT: Simplified rules for deposits and pre-payments
Neil Warren explains the new HMRC policy for dealing with VAT on unfulfilled supplies, which should make life easier for business owners.
I recently booked a night’s accommodation at a hotel for the end of March. I paid the full £60 fee for my booking but I can no longer make the date in question, and the terms and conditions mean I don’t get a refund.
What about the VAT I have paid within the £60 fee? Must the hotel still pay £10 output tax to HMRC, even though it has not supplied me with any goods or services, or can it keep this amount? Did the hotel supply me with a service, ie: the right to use the room, even though I won’t take up the booking? In the VAT world, the right to receive something is still a supply.
HMRC policy change
HMRC Business Brief 13 (2018) was issued on 13 December 2018 and applies from 1 March 2019. In effect, HMRC has cleared the muddy waters on this issue (including my hotel booking) by confirming the following change in its interpretation of the law:
“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.”
CJEU case law
The policy change was announced in the 2018 Budget so is not unexpected. HMRC justifies making the change without amending the law because it is applying the conclusions of two CJEU cases.
Air France-KLM (C-250/14): air tickets purchased and not used by the buyer
FIRIN ODD (C-107/13): input tax on supplies where payment has been made but no taxable transaction has been carried out.
In the Air France-KLM case, the dispute related to VAT of 5.5% that applies to flights within French territory and whether output tax was payable on cancelled bookings. In ruling for the tax authorities, the court confirmed that the relevant issue was “the passenger’s right to benefit from the performance of the transport service regardless of whether the passenger exercises that right.”
Going back to my hotel example, if I cancel my booking with the hotel before 1 March 2019, the Business Brief (2018/13) confirms that the hotel can retain the full £60 deposit and reduce its output tax if this has always been its past policy. However, if the hotel’s policy has always been to pay the output tax, then HMRC says it cannot change its policy (or claim a windfall on past cancellations and no-shows) because it has applied the law correctly. If I cancel my booking on or after 1 March 2019, or just don’t show up, the new interpretation will apply to my sacrificed deposit ie no reduction in output tax is allowed.
In 2013/14, a case about advance annual gym memberships received by Esporta Ltd EWCA Civ 155 was heard in three different courts, the issue being whether output tax could be adjusted if a member cancelled his subscription before the end of the year. The VAT at stake was £1.3m and the court ruled in favour of HMRC, confirming that the company had supplied the right of entry to the gym, even though the member did not fully utilise the facility.
The positive outcome with the new HMRC policy set out in Business Brief 2018/13 is that debates and arguments about the VAT status of forfeited advance payments and deposits should be confined to history. If the supplier keeps the money in the event of a cancellation of goods or services, and it is linked to a VATable supply, then output tax cannot be reduced. This is a rare and welcome victory for tax simplification.