What Business Owners Need to Know About VAT on Deposits

Types of advance payments and deposits

Often, a business will ask a customer or a supplier to provide an advance payment to act as a deposit on a service that will be provided at a point in the future. A good example of this is the hotel and travel industry, where a guest must put a deposit down prior to arrival to secure a room or a property. 

Other examples of deposits or advance payments include:

• Instalments
• Credit sales
• Periodic payments for ongoing suppliers or services
• Security deposits for hired goods

What has changed with VAT on deposits?

VAT must be charged on all the types of payments listed above. However, His Majesty's Revenue and Customs service (HMRC) changed the rules regarding deposits paid in advance of services or on hired goods. Previously, when a customer paid a deposit, VAT was applied to the purchase. Occasionally, a client may have decided that they did not wish to retain the service, cancelled the service, or simply did not arrive to make use of it (known as a ‘no-show’).

In these cases, a business owner would often retain the deposit to recoup the costs involved in organising the service or good for the customer. Although VAT was charged on the deposit amount, HMRC did not oblige business owners to pay this VAT back to the UK government if the customers cancelled or were a no-show. The business owners in question would simply keep the entirety of the deposit, VAT included. 

This practice was allowed to continue as there was some uncertainty over whether or not the consumer had paid for a service since the supply had not actually taken place. VAT is defined as a consumption tax. In cases of no-shows or cancelled bookings, customers were believed to have not consumed anything and so VAT was not applicable. This loophole left business owners in a position whereby they were able to keep the VAT charged on the deposit. 

It is this aspect of VAT on deposits that have changed. From 1^st March 2019 HMRC has required that all VAT on deposits is to be counted as output VAT and is now required to be reported and paid to HMRC via VAT returns. 

This rule now applies to all deposits, including deposits for flight reservations, table reservations in restaurants, reserving hotel rooms, paying deposits on hire equipment and so on. It should be noted that deposits paid as security against breakages are not included in this category, regardless of whether they are retained by the business or paid back to the customer.  

When did the change to VAT on deposits happen?

This change was introduced in the 2018 HMRC Autumn Budget and applicable from 1^st March 2019. The change to VAT on deposits was brought about because of a judgement in 2018 from the Court of Justice of the European Union (CJEU). The CJEU ruled that customers who pay deposits and then do not go through with the service actually do receive a service known as a ‘right of reservation’. That is, they have consumed something and the business is therefore liable for VAT. 

What has not been changed with VAT on deposits

Anytime a customer pays a deposit and consumes the service or goods being reserved, then nothing changes in the way a business charges for and accounts for VAT. If the deposit is returned to the customer, then any VAT on the original receipt can be reversed and no VAT is due to HMRC. The VAT process associated with zero-rated goods or services also does not change. 

How does this change impact business owners?

In essence, HMRC did not simply change the law as of 1^st March 2019. In fact, the CJEU ruling meant that any deposit paid before this time was always liable for VAT and therefore all deposits paid prior to this date should have had VAT charged and paid to HMRC. 

Businesses that have paid deposits for business-related goods or services they did not take up now have the right to request a VAT invoice from the supplier so they can claim back the VAT on their tax returns. If your business has retained deposits from other commercial entities that did not use the goods or services in question, then those commercial entities have the right to request an invoice showing the VAT paid. Some businesses may find this difficult if they do not have up-to-date accounting. 

Mooncard makes it simple to keep on top of your business purchases. Using Mooncard, you will always have a digital record of every invoice paid for by your business. It’s a great system for any business owner or self-employed person. With Mooncard, you’ll always have your accounts in order and ready for the VAT return deadline. You can book a no-obligation, free demonstration of Mooncard via our website. 

Find out more articles on VAT : 

• Defer VAT Payment