VATSC05821 - Consideration: Payments that are consideration: Deposits and hotel booking charges: Background

The term “deposit” is generally used to describe any payment received in advance of the making of a supply. Usually deposits are intended as a demonstration of good faith on the part of the customer or to assist the supplier to finance the supply.

Most deposit payments represent consideration since the amount paid will be offset against the full purchase price once the supply is made. Such payments fall within the scope of VAT and follow the liability of the supply. The tax point treatment is described in the Time of Supply Guidance in VATTOS3000.

Where a deposit is returned, the consideration is reduced and any VAT accounted for may be adjusted under Regulation 38. If the deposit is retained by the supplier in the event of the contract being cancelled it remains consideration for a supply and is taxable.

Any amount paid on account for a service is consideration for the customer’s right to benefit from the performance of obligations arising from the contract to provide services, regardless of whether the customer exercises that right. The supply is fulfilled when the supplier makes the service available for the customer’s use and any amount retained cannot be regarded as non-taxable compensation. The payment creates a chargeable event and VAT is due when this occurs. There is no right to adjust VAT accounted for on a chargeable event unless the consideration is reduced e.g. the supplier returns money to the customer.