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HMRC internal manual

VAT Time of supply

Actual tax points: payments: deposits and pre-payments

It is common for suppliers to require the payment of a deposit when an order is placed with them. This may be intended to indicate good faith on the part of the customer or to put the supplier in funds to allow manufacture to commence. Depending on the contract the deposit may be refundable if the contract is subsequently cancelled or may be liable, either wholly or in part, to forfeiture.

With the exception of security deposits (see VATTOS5135), a pre-payment or deposit intended by the payer and recipient to eventually form part of the consideration for an identifiable supply, will create a tax point under section 6(4) ofthe VAT Act 1994 (see VATTOS2225). However, it should be noted that the requirement for the potential supply to be sufficiently identified follows from the ECJ decision in the case of Bupa Hospitals Ltd/Goldsborough Developments Ltd (C-419/02). In the normal course of events it is unlikely that apre- payment will fail to meet the criteria for the creation of a tax point established by the decision. But cases of doubt should be referred to Place and Time of Supply Team, along with details of any cases in which payment tax points form part of a forestalling arrangement similar to that considered by the ECJ in the Bupa case.

Domestically, pre-payments and their tax points have been the subject of a number of Tribunal decisions over the years. The Tribunals have consistently held that they do create tax points. One case that is frequently referred to is Bethway& Moss Ltd (VTD 2667). Bethway & Moss Ltd were suppliers of kitchen units. In a detailed decision the Tribunal held that deposits paid by customers when placing an order created a tax point at the time the deposit was received. The appellant company argued that it could not be regarded as the person making the supply for the purposes of section 5(1) of the VAT Act 1983 (now section 6(4) of the 1994 Act) because there was no certainty at the time the deposit was received that a supply would in fact take place. The Tribunal, in rejecting that argument, held that the ‘person making the supply’in section 5(1)

‘ *ought to be construed as meaning the person who is to make the supply’ *

*Moonraker’s Guest House Ltd ([1992] STC 544) *concerned the renting out of holiday accommodation on the Scilly Isles. Customers were required to pay a deposit when making a booking. In the event of a cancellation the deposit would be refunded unless the accommodation could not be re-let, in which case the deposit was retained. The company appealed against an assessment raised on the basis that VAT was due at the time the deposits were received.

The Tribunal upheld the appeal on the grounds that the money remained the property of the customer until the accommodation was occupied and the balance fell due. However, the decision was overturned in the High Court where it was held that the deposits represented payments in respect of a supply, the receipt of which created a tax point under section5(1) of the VAT Act 1983 (now section 6(4) of the 1994 Act). The judge also considered the position where VAT has been accounted for but the supply does not in fact take place. Inhis view the VAT previously accounted for can, at that time, be adjusted accordingly. See also VATTOS5125 on refundable deposits.