VAT and Deposits – HMRC Updated Guidance

Oct 6, 2020
Stephen is one of the firm’s tax partners. He specialises in income tax, capital gains tax, corporation tax, inheritance tax, and stamp duty land tax. He also specialises in advising property and construction businesses.
vat and deposits

VAT and Deposits 

HMRC has recently issued new guidance on the subject of deposits, which will have an application to many businesses.

A “deposit” is generally used to describe any payment received in advance of the making of a taxable supply.  For example, a deposit is often made in order to reserve a hotel room. Most deposit payments represent consideration since the amount paid will be offset against the full purchase price once the supply is made. Such payments fall within the scope of VAT and follow the liability of the supply – this is usually at 20%.

HMRC’s updated guidance states “Any amount paid on account for a service is consideration for the customer’s right to benefit from the performance of obligations arising from the contract to provide services, regardless of whether the customer exercises that right. The supply is fulfilled when the supplier makes the service available for the customer’s use and any amount retained cannot be regarded as non-taxable compensation.  The payment creates a chargeable event and VAT is due when this occurs.”

There is no right to adjust VAT accounted for on a chargeable event unless the consideration is reduced e.g. the supplier returns money to the customer.  Where a deposit is returned, the consideration is reduced and any VAT accounted for may be adjusted on a subsequent VAT return. If the deposit is retained by the supplier in the event of the contract being cancelled it remains a consideration for a supply and is VATable.


HMRC had previously thought (incorrectly it appears) that as the actual supply had not taken place, and as VAT is a consumption tax, nothing had been consumed and so no VAT was due on the retained deposit. So, if a customer cancelled a hotel room reservation and lost the deposit then the hotel would generally not pay VAT over to HMRC on the retained deposit on the basis that no supply had taken place.


However subsequent ECJ judgments have declared that VAT policy in the UK is wrong on this issue, hence the update.


So, in the above example, the hotel should pay over VAT to HMRC on the retained deposit.


This could have a significant impact on some industries.


If you have any questions about VAT, please contact us.


Tony Nickson is a VAT Consultant at the firm. He provides practical VAT advice to a wide range of clients in numerous business sectors and advises on matters relating to sole proprietors, partnerships and corporate bodies on all VAT issues including exporting, importing or providing goods/services within the UK. Please contact Tony on or 0114 266 7141.

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Stephen Charles

Tax Partner, Sheffield