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Change in Policy for Retained Deposits

Thursday February 2019

My client and her husband run a boutique hotel in partnership. Due to the location and quirky nature of the décor, they are increasingly getting requests to host celebrations and parties in addition to overnight accommodation. As the financial outlay in preparing and staging the events can be quite considerable, the client asks for a 25% deposit up-front, which is non-refundable if the event is cancelled. Please, could you advise on the VAT treatment and time of supply implications of these deposit payments?

Towards the end of last year,  HMRC issued Revenue and Customs Brief 13/18,, to announce their change in policy regarding the VAT treatment of retained deposits, which is to take effect from 1st March 2019. This policy review was prompted by the CJEU decisions in two cases (Air France and Firin OOD) in respect of what is termed unfulfilled supplies.

Although it is acknowledged that a tax point is created and output tax is due upon receipt of a deposit, HMRC’s current policy allows businesses to change the VAT  treatment of deposits retained following cancellation; redefining them as compensation and therefore outside the scope of VAT.

However, with effect from 1st March 2019, where a customer makes a payment for an anticipated supply, it cannot be reclassified later as compensation for supplier loss.  No adjustment may be made unless it is refunded to the customer. Any retained deposits will remain subject to VAT and as HMRC state, “no adjustments or refunds of VAT will be allowed”.

This was the subject of an earlier VQOTW ( which remains extant apart from the final paragraph regarding the reclassification of a retained deposit. That will now follow the rules described above from 1st March.

It should be noted that this policy does not affect the VAT treatment of security deposits for goods on hire or property leases, which are later retained. These are outside the scope of VAT when taken, as they are to be held in abeyance pending any damage or loss.

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