VAT on Customer Deposits - especially relevant to hotels and guest houses

HM Revenue & Customs have recently made a change in the rules relating to the VAT treatment of non-refundable deposits received from customers.

The change applies where the customer forfeits a non-refundable deposit by either subsequently cancelling their booking or by being a “no show”, following a European Court case. HM Revenue & Customs have now stated that in such cases no VAT supply has taken place to the customer and the amount retained therefore becomes compensation - which is outside the scope of VAT. Under their previous guidance you would have accounted for VAT on the receipt of such deposits and as the previous guidance was incorrect you can now go back a maximum of 4 years and reclaim the VAT involved.

We therefore suggest that if you have declared VAT on any such deposits then you should review your bookings and business records for the last four years and reclaim the VAT element. If you require our assistance in making such a claim then please let us know.

Please note that this revised guidance also applies proportionately where a booking has been taken, and a deposit paid, but the guest then stays for less time than they booked for. However, HMRC do take the view that VAT is correctly accountable if the deposit relates to the reserving of a particular type of room such as “ground floor” or “sea view” as this is regarded as a guaranteed reservation granted for an optional payment.

The ruling only applies to forfeited deposits and does not change the position regarding deposits paid by customers who actually complete their stay. VAT will still apply on these deposits in the normal way.

For the future, VAT will still need to be declared on deposits at the time they are received. You should then reclaim the VAT element of any deposits withheld if the booking is subsequently not taken up, in the normal way on your VAT Returns.

Comments

[VAT Return]

you have mentioned good guidance to the customer with relevant and informative logic of deposit.Above mentioned rules are quite valid to improve VAT elements.