Revenue and Customs Brief 13 (2018): change to the VAT treatment of retained payments and deposits
Published 14 December 2018
© Crown copyright 2018
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits
1. Purpose of this brief
This brief explains HMRC’s new policy on VAT and payments for unfulfilled supplies which applies from 1 March 2019.
2. Readership
Businesses that retain payments and deposits for goods and services which customers do not take up.
3. Background
Following judgements of the Court of Justice of the European Union (CJEU), we have reviewed our policy on the VAT treatment of payments for unfulfilled supplies. An unfulfilled supply is where a customer does not use a service or collect goods that they have paid for.
Our current policy lets businesses treat many payments for services and part payments for goods, as outside the scope of VAT where the customer does not:
- use the service
- collect the goods
CJEU decisions given after this policy started (Air France-KLM and Firin OOD) make it clear that this treatment must be amended.
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.
4. New policy
From 1 March 2019 HMRC policy will be that VAT is due on all retained payments for unused services and uncollected goods. This will bring consistency of VAT treatment on all payments for goods and services where there is an unfulfilled supply.
Where suppliers become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.
If suppliers find out the relevant goods or services will not be used or received before 1 March 2019, they may treat the prepayments under our current policy.
4.1 Example
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.
5. Credit card guarantees
Where credit card details are taken, but no payment is taken until the service or goods are due to be used or collected, VAT is due when the payment is taken.
When a customer agrees to pay for a supply of services or goods on a future date, the payment cannot be reclassified if the supply is unfulfilled.
6. Previous VAT periods
Businesses that have not treated payments for unfulfilled supplies as outside the scope of VAT have applied the law correctly. They cannot make any adjustment to previous VAT periods to treat supplies in line with former policy, as no error has been made.
7. Guidance
HMRC will change our guidance manuals and public notices before 1 March 2019 to reflect this change.