UK | New VAT Treatment for Retained Payments and Deposits

HMRC has changed its policy on the VAT treatment of payments for unfilled supplies. From 1st March 2019, VAT will be due on all deposits received for unused services and uncollected goods, which customers paid for in advance and for which they have not received a refund.

Current HMRC practice allows businesses to often treat these advance payments as outside the scope of VAT.  In effect the business acts as if no supply has been made and the payment is characterised as compensation for losses sustained by the supplier in relation to preparing the unused services or uncollected goods.

New Rules from 1st March 2019

Under the new rules, if the supply does not take place, the VAT due may only be reduced in the case of refundable deposits.  The guidance explains that when a customer makes an advance payment, it is for a supply. If subsequently, the supply does not take place, it cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not collect or use the goods or services.

If suppliers find out the relevant goods or services will not be used or received before 1 March 2019, they may treat the prepayments as outside the scope of VAT, in line with HMRC’s current policy.  After that the VAT should not be adjusted.

This measure, previously announced in the 2018 Budget, has been taken in response to rulings of the Court of Justice of the European Union. It aims to harmonise the VAT treatment applied to deposits and will generally have most impact on businesses involved in the tourism and entertainment sectors.  For example, the provision of non-refundable airplane tickets or hotel rooms.

If you would like further advice on how this change affects your business, please do get in touch to discuss how we can help.