Non-refundable deposits and VAT
There was a time when deposits were straight forward; if the provider of the goods or services received a deposit this created a tax point and VAT was due.
If the deposit was non-refundable and the buyer pulled out of a transaction, that deposit was then seen as compensation and outside the scope of VAT.
However, in 2019, HMRC changed its policy on all non-refundable deposits, pushing them within the scope of VAT.
Previously, HMRC followed precedent set by the European Court of Justice.
For example, on hotel deposits, this precedent dictated that VAT would be accounted for when the hotel received the deposit. However, if the customer did not turn up they would forfeit their deposit and as the hotel accommodation would not be used and it was not supplying anything to the traveler, VAT would not be applied. Therefore, any VAT that was paid would be claimed back on the basis that the hotel was compensated for a no show.
However, subsequent cases, such as AirFrance-KLM have overturned this. In the AirFrance case, it was ruled that as a ticket had been purchased, a supply had been made, regardless of whether the buyer used that ticket.
While it can be argued that a hotel deposit and a fully paid flight ticket are not similar, HMRC has enacted the decision and stated in the Revenue and Business Brief 13 (2018) that;
When a full or part payment is made on account for a taxable supply, a chargeable event occurs and VAT becomes due on the amount paid.
If the supply does not take place, the VAT must not be reduced, unless the payment is refunded. This is because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.
Land and Property
Anyone who deals in land and property, particularly those that deal with VAT, will know that it can have a number of different tax treatments. The tax treatment is determined by what happens, what the property is, or how it has been sold.
For example, with a new commercial property the VAT treatment could be;
- Sale of freehold – VAT due at the standard rate
- Sale of freehold to a charity for its non-business use – VAT due at the zero rate (on the supply of a certificate)
- Grant of a long lease (say 999 years) – exempt from VAT
- Sale with the benefit of a prospective tenant – outside the scope of VAT (as a TOGC)
So, for a commercial property we have all four potential VAT treatments.
It doesn’t get any easier for residential property. For example, the sale of a new house can be;
Grant of a major interest by a person constructing – VAT at the zero rate
Grant of the lease is less than 21 years – VAT exempt
Sale where there is a restriction in occupation for only holiday accommodation – VAT at the standard rate
Sale with the tenant in place – outside the scope of VAT,as a transfer of a business as a going concern (TOGC)
The best example is that of a new house; if a deposit is made, it should be zero rated as the sale is normally a freehold sale of a new house, which is a grant of a major interest.
However, in the case of a forfeited deposit, the sale does not go ahead. This means the deposit cannot remain zero rated as the conditions for that rate to apply have not been met; i.e. the major interest has not been granted. The same would be true of other VAT reliefs; there cannot be a zero-rated sale to a charity if the building will not be used by that charity for its non-business use.
In a welcome clarification, HMRC has stated that the VAT liability of the deposit will follow what it would have been had the sale taken place.
For goods and services, where a deposit attracts VAT, it is recommended that the vendor should ensure that VAT is declared and collected on that deposit; if it is treated as net, it is unlikely that the buyer will want to pay an additional amount of VAT after losing their deposit, even if a tax invoice is issued.
Regardless of the tax treatment, the evidence that would be used if the sale of a property had gone through should still be collected at the time the deposit is collected. This includes:
- Any certificate issued by the buyer.
- All conditions for a TOGC are met, or at the very least the contract make it clear that both parties agree that the sale will be a TOGC.
For further information and advice, contact our Partner and VAT specialist, Richard Staunton at firstname.lastname@example.org. Or, alternatively, take a look at our other VAT services.