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Blog // 21/01/2019

VAT on Forfeited Deposits

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A change in HMRC’s policy means that hotels will no longer be able to claim back VAT on retained payments for no-shows.

What is the change and why is it happening?

question marksUntil 1 March 2019, if a guest pays in advance and is a no-show, the hotel may have been entitled to treat the amount received as VAT free.

Following the conclusion of two court cases, HMRC has updated its policy. Payments forfeited due to a no-show will no longer give rise to an adjustment to claim back the VAT paid.

Since 2007, HMRC have had to apply the principle set out in the Eugenie-les-Bains case in the CJEU. The finding in that case was that, if a customer paid in advance, but then failed to turn up, and the hotel retained the payment as compensation, the hotel could reverse the VAT accounted for on the original payment. The VAT could be retained by the hotel, meaning that the hotel held compensation equal to the VAT inclusive amount. In the case of a guaranteed room, the VAT could not be reversed out.

Two further cases have changed the characterisation of what the retained payment represents. Previously, the view was that if the guest did not turn up, they had not received anything. The underlying principle of VAT is that it is chargeable on the price paid when something is done or given in return for a payment. Both the ‘something done or given’ and the payment must be present to give rise to a VAT charge. If the guest does not use the hotel room, then nothing is given in return for the payment and therefore the payment cannot be subject to VAT. In the case of the guaranteed room, the customer had the benefit of an available room even if they did not turn up and use it. The new interpretation is that the customer always receives the benefit of having a room available for them, whether the booking is for a guaranteed room or not. As the customer has received the benefit of a room being available, in return for a payment, that payment is therefore subject to VAT.

Hotels which have been adjusting back VAT on no-show payments can continue to do so on cancellations notified or no-shows before 1st March 2019. In respect of payments forfeited after that date, no adjustment can be made for VAT.

HMRC were reluctant to apply the treatment above, but were obliged to do so due to the findings of the CJEU. They have issued guidance which confirms that they believe that the new treatment set out above has always been the correct treatment. Hotels which were not already claiming back VAT on forfeit deposits cannot start to make claims now for the period until 1 March 2019.

Hotels currently claiming back VAT on retained payments for no-shows will need to stop making those adjustments for no-shows after 1 March 2019.

An Example

A customer makes a booking on 1 January 2019 for a room on 19th April 2019. Payment is taken of £200. VAT of £33.33 is included in the hotel’s VAT return for the period covering January 2019.

Cancellation before 1 March 2019
– Customer notifies on 28 February that they are not going to use the room, they are not entitled to a refund.
– If the hotel has routinely been adjusting back VAT on cancellations/no-shows, it can adjust back the VAT on the retained payment for this room, reducing its VAT return covering February 2019 by £33.33.
– If the hotel has not been routinely adding back VAT on no-shows, no adjustment should be made.

Cancellation after 1 March 2019
– Without any notification, the customer fails to check in to use the room, or they notify after 1 March 2019.
– The VAT on the payment already taken cannot be reversed out of the VAT return.

There is no change to the treatment of refunds. If a customer pays up front, cancels and receives a refund, the VAT on the refund will still be adjusted in the hotel’s VAT return. Pre-authorised credit card payments should continue to be included in the VAT return for the period when the payment is actually taken.

Sarah Baron - Menzies AccountantFor advice on how this change may affect your business or on any other VAT matters, please speak to your usual Menzies contact or Sarah Barron, Senior VAT Manager on 01489 566298 or at sbarron@menzies.co.uk.

Find out more about Menzies VAT Advisory services.

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