VATSC05822 - Consideration: Payments that are consideration: Deposits and hotel booking charges: Legal background to hotel reservation charges

There are two cases to take into account when considering the VAT treatment of hotel charges. These are the High Court decision in the case of Bass plc (1993) STC 42 and the decision of the ECJ in the case of Société thermale d’Eugénie-les-Bains (C-277/05).

Bass plc

Ordinarily a hotel would undertake to reserve a room for a guest up to 6pm on the day of arrival. After this the booking would lapse. Alternatively the guest could opt for a “guaranteed room” which would be held for their use until 1.00pm on the following day. As a result the hotel was obliged to retain an empty room and had no discretion to re-let until the guarantee period had elapsed.

The customer could arrive at anytime up to 1.00p.m. on the day after their intended arrival and make use of the room. For their part the customer undertook to pay for the room whether they used it or not. The Court held that in these circumstances the hotel was providing a service in making a room available to the guest and that the payment was the consideration for that service.

Société thermale d’Eugénie-les-Bains

In Société thermale d’Eugénie-les-Bains, the ECJ considered deposits paid to secure hotel reservations which were retained when the guest contacted the hotel to state that they were not taking up the booking. The ECJ considered that the deposits were intended to mark the conclusion of a contract, to encourage the fulfilment of that contract and to provide fixed compensation for the hotel should the contract not be fulfilled as agreed. On this basis it was held that in these circumstances the retained deposit should not attract VAT as the hotel was not making a supply of any identifiable service to the customer. The Court may well have been influenced by the customer’s right under French law to receive double the deposit as compensation should the hotel fail to provide a room.

Following the decision in Société Thermale d’Eugénie-Les-Bains the UK accepted that many deposits were not consideration for a supply and we altered our policy to reflect this, permitting suppliers to treat deposits as outside the scope of VAT when the customer cancelled or failed to show up. It did not change our policy in situations akin to those in Bass plc where a room was guaranteed, and it was clear that the customer had received a supply as the room was made available.

On the 1 March 2019 our policy changed for future supplies to reflect later CJEU decisions, in particular Air France-KLM (C-250/14 and C-289/14) and Firin OOD (C-107/13).

Air France-KLM: This case considered whether airline tickets paid for in advance (taxable at a reduced rate in France), where the customer did not take the flight booked and where no refund was given were subject to VAT. The court concluded that the customer purchased the right to benefit from the performance of the transport service, regardless of whether the passenger exercises that right. So, for VAT to be due it is sufficient that the airline commits to enable the passenger to benefit from the transport service. The VAT becomes due when the payment is taken.

Firin OOD: This case considered whether a customer is entitled to recover input tax on an advance payment on account for a supply of goods where the delivery is not made. The judgement made clear that where a payment on account has not been refunded by the supplier then the VAT due as a result of that payment cannot be reduced.

Section 6 (4) of the VAT Act 1994) makes clear that a payment made prior to the issue of an invoice or the basic tax point, creates a chargeable event. VAT therefore becomes due at that point. This VAT may only be reduced if the consideration is subsequently reduced and the payment refunded.

Our revised policy is therefore, to allow adjustments to VAT paid on consideration for taxable supplies to be made only if a refund is made (and only to the extent of the refund – i.e. if 50% of the deposit is refunded then only 50% of the VAT accounted for can be adjusted).