The basic premise is that VAT is due if there is a supply for a consideration.
The supply will either be physical goods or a service and the consideration is normally monetary but does not need to be.
Hospitality and leisure businesses that have been charging cancellation fees or no show fees may not have to account for VAT on those fees. This does depend on the exact details of how the cancellation fee is raised. HMRC guidance for the hospitality sector states that merely changing the name of a deposit to a cancellation fee is not enough. Businesses need to provide enough evidence to support a claim, based on the contractual terms. If a business makes a cancellation charge and this is set out in the agreement, this charge is outside the scope of VAT.
VAT ON BOOKING DEPOSITS
The accepted view is that a deposit, if it is not returnable, is an advance payment for a supply and therefore VAT is due if the supply is taxable. The tax point follows the normal rules. With the rate having changed from 5% to 12.5% on 1st October 2021 for the hospitality sector, VAT needs to be accounted for at the rate when the deposit was received – irrespective of when the supply is delivered.
VAT ON CANCELLATION FEES
HMRC accept that a “true” compensation payment is outside the scope of VAT as there has been no supply in return for the payment. There have been a couple of legal cases for VAT purposes on whether payments are compensation payments or not. The ECJ case of Société Thermale d’Eugénie-les-Bains in 2007 ruled that the money taken at the time of booking could be regarded as compensation and not liable to VAT. In contrast, the case taken by Vodafone that early termination payments were compensation payments was not successful as HMRC successfully argued that these payments were payments to break the contract and not true compensation payments.
Consider the following:
In the case of cancellation fees or no show fees, has a supply been made?
Is the payment in way of compensation?
Just renaming the payment from deposit to cancellation fee is not enough in HMRC’s view to make the payment a compensation payment and not liable to VAT. HMRC in their guidance also state that where credit card details are taken and then used to charge a compensation fee if the customer does not show are again not seen as compensation fees and VAT would be due. However where there is a contract in place and the contract states there will be a cancellation fee charged then VAT may not be due. Businesses should make it clear to customers when a no show or cancellation fees will be charged and under what circumstances, this could be done at the time of booking and or via the terms and conditions.
Any business that has charged compensation fees or no show fees and accounted for VAT but meet the conditions of a compensation payment then a refund of VAT may be due. Depending on the amounts due these can either be corrected on the next VAT return or a disclosure should be made to HMRC.
If you have any question on this or other VAT issues please contact Andrew Norman, VAT Director at Menzies LLP at email@example.com or Dave Gosling, Hospitality and Leisure Partner at Menzies LLP at firstname.lastname@example.org