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H&L businesses: VAT overpayment claims could be on the rise as we approach Christmas

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There is no doubt that restaurant and pub businesses have faced a perfect storm of challenges throughout the pandemic. At a time when factors such as continuing staff shortages, rising costs of supplies as well as higher energy costs and rising wage bills are impacting profitability across the sector, ‘no-show’ customers can have a significant impact on the financial performance of a pub or restaurant business.

The evolving Covid situation has caused the Government to re-introduce their stay at home advice, which has come at a disastrous time for may hospitality and leisure businesses. In the run up to Christmas many business owners are desperate to recoup lost revenue over the last 18 months and were looking forward to the Christmas lunch bookings, many of which have now been cancelled due to the new restrictions and has increased customers wariness to socialising in public settings. Those who have introduced booking fees or cancellation charges can recoup some costs but is a blow to the industry none the less.

Introducing charges and fees

As a result of the turbulent year the industry has had, many businesses have introduced cancellation charges and booking fees, with the aim of discouraging such behaviour and to help protect their business model. This has led to many introducing booking fees and/or cancellation charges, in order to cover their costs in case of customers not turning up or cancellations due to Covid related restrictions.

However, there can be confusion around the VAT treatment of such transactions which could mean many businesses are not accounting for VAT correctly. This could result in an increase in errors on VAT returns and the need for corrections and possible claims for VAT overpayments in the run up to Christmas. So, what do businesses in the hospitality and leisure (H&L) sector need to know?

How are these charges and fees treated?

Booking fees and cancellation charges are treated very differently from a VAT perspective. Any confusion in this area could see companies who do not account for VAT correctly, facing an impact on their cashflow and in some cases even HMRC investigations in the future, leading to potential penalties, interest and additional not accounted for costs.

In order to properly understand the differences in the VAT treatment of these types of transactions, it is vital that business owners understand how VAT legislation has evolved over time. For example, value-added tax is usually charged whenever there is a transaction of goods or services. However, it does not apply if the payment is deemed to be a compensation payment. Any cancellation charges would fall into this category, but a booking fee would be excluded. This is because a deposit, if it is non-returnable, is viewed as an advance payment for supply.

Implementation

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When implementing these types of transactions, it’s vital that businesses make it clear to their customers from the beginning what kind of transaction they are making, whether it a booking fee or cancellation charge. They should also make sure they have enough evidence to support a claim for VAT, which should be based on their contractual terms. As an example, if a business makes a cancellation charge and it is set out in their agreement with customers, it is classed as being outside the scope of VAT. Business owners should also be aware to avoid simply renaming a deposit as a cancellation fee at a later date or vice versa, in order to optimise their VAT position. For example, if the business has taken a booking deposit and the customer does not show up, many would be tempted to treat this as a cancellation charge instead. However, HMRC states in its Hotels and Holiday Accommodation VAT Notice, that this is not permitted and could result in an investigation of past VAT claims.

HMRC’s guidance also implies that if credit card details are taken at the time of the booking, and then used to charge a fee if the customer fails to show up, this can’t automatically be classed as compensation and therefore VAT would be due. On the other hand, if there is a contract in place, which clearly states to the customer that a cancellation fee would be payable in these circumstances, then VAT would not be due.

What to remember

It’s important to remember over the last 18 months, temporary changes to VAT rates and the introduction of Coronavirus support measures have meant that the process of accounting for VAT for pub and restaurant businesses has become significantly more complex. For example, for the period from 15th July 2020 to 30th September 2021, VAT on the sale of food and non-alcoholic drinks consumed on a business’ premises was reduced to 5 per cent from the original 20 per cent. Following this, the VAT has increased to 12.5 per cent, but from 31st March 2022 will rise to 20 per cent. Businesses also need to take ensure that they apply the correct VAT rate, depending on the time a booking deposit is made.

For those businesses who have charged compensation or no-show fees and accounted for VAT, but actually met the conditions of a compensation payment, it’s not too late. Depending on the amounts due, these can either be corrected on the next VAT return or a disclosure should be made to HMRC as soon as possible.

Although while many hospitality and leisure businesses are trying to get back on their feet financially, the last thing they need are errors in how they account for VAT, which could have a significant impact on their bottom line. By clearly informing customers whether they’re introducing cancellation fees or booking charges, pub and restaurant businesses can optimise their VAT position during the festive season and reduce the likelihood of unwanted HMRC investigations.

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Posted in Blog, Hospitality & leisure