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Changes to VAT rules for unfulfilled supplies and retention of deposits

Robert Marchant, Partner, VAT
modern glass building

In what will be disappointing news for businesses, HMRC has announced changes to the VAT treatment of unfulfilled supplies and the retention of customer deposits. From 1 March 2019, businesses will be required to account for VAT on the retention of customer payments even where the customer does not use the service or collect the goods for which they have paid.

Previously, businesses could treat such charges as outside the scope of VAT on the basis that either no supply had been made or that the retention of the customer’s deposit reflected compensation for the costs incurred by the supplier in preparing the goods/services that the customer ordered but which did not use/collect.

New rules

The new rules apply across all sectors but businesses operating in the hotel/ holiday accommodation, car rental and entertainment sectors are expected to be particularly impacted by this change.

From 1 March 2019 HMRC’s policy is that VAT is due on all retained payments for unused services and uncollected goods. Where suppliers become aware that a customer has decided not to take up goods or services after paying, or the customer is a “no-show” the transaction will remain subject to VAT. It is HMRC’s view that this is because when a customer makes a payment, a supply is made and VAT is due unless the payment is refunded. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.

If suppliers find out the relevant goods or services will not be used or received before the change in the rules (1 March 2019), they may treat the prepayments as VAT free under current policy.

For further information or to discuss how the changes impact your business please contact Robert Marchant, VAT Partner, on 0207 842 7383

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Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services