VATSC05827 - Consideration: Payments that are consideration: Deposits and hotel booking charges: Examples illustrating Hotel cancellation/no-show

A customer books a hotel room in advance and, at the time of booking, pays £100 being the full price of the room. The customer cancels or fails to turn up and, in accordance with the booking terms, the hotel keeps the full amount of the payment.

The £100 is taxable. The circumstances described in the example are closely aligned to the situation dealt with by the Court of Justice in Air France. There is a payment in advance for a service that is to be supplied at an agreed point in the future. The conditions are therefore set for VAT to become chargeable under section 6(4) of the VAT Act 1994 and the fact that the contemplated service is not used cannot alter the incidence of the tax charge.

Keeping the same facts as in Example 1, if the payment on account is 50% of the agreed price i.e. £50 then that £50 is taxable.

If the payment in advance is for £99 with the balance of £1 becoming payable when the room is used and that room is not used then the £99 is taxable.

Thus, where a payment is made on account for services to be supplied, the payment cannot retrospectively be treated as a non-taxable compensation payment nor can the transaction be treated as though there had been no supply at all.

The taxable amount may only be reduced to the extent that the supplier refunds the payment to the customer. This is in line with the Court of Justice decision in Firin.