HMRC Policy Change - VAT treatment of deposits/cancellation fees
HMRC announced a significant change to the VAT treatment of cancellation fees in Revenue and Customs Brief 13/18.
Effective from 1 March 2019, the new policy has serious implications for the hospitality sector. Until now, where a deposit was retained after a customer cancelled a booking, hoteliers were able to treat the deposit as a compensation payment - something which is outside the scope of VAT. The rationale being that no supply would be made in the event of a cancellation - it could not therefore attract VAT.
Where hotels have already accounted for VAT on the basis that the deposit represented part payment for the supply of a room, they will no longer be able to credit their VAT account where the customer subsequently cancels after March 1.
The change in policy comes after two high profile CJEU judgments Air France - KLM & Firin OOD which established that where a customer pays a deposit it is for a supply and that such a payment cannot be reclassified as compensation where a customer subsequently cancels.
VAT can only be reversed to the extent that a customer is refunded.
The treatment applies in all situations where contracts allow for a supplier to retain amounts where a customer cancels or decides not to take up goods or services after paying. Deposits received prior to 1 March will be affected by the new treatment if the customer cancels after 1 March.
This is quite a change and it may be one that has flown under the radar for many - the initial announcement being made in the run up to Xmas. We see more logic in the previous policy - VAT is not to be charged where there is no supply - than the CJEU judgments - the nature of a supply cannot be reclassified. If the customer is aware at the outset that a deposit serves a dual purpose part payment or cancellation fee it might be contended that there is no reclassification at all.
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