16 July 2019
It is standard practice for some hotels and other accommodation providers to ask customers for a deposit or advance payment on making a booking, to give some security against a no-show or cancellation. Until recently, for a customer who had paid such an advance (including VAT) and was not entitled to a refund upon cancellation, the deposit was deemed to be free from VAT in practice, i.e. the hotelier did not have to pay over the VAT element to HMRC.
However, following judgements of the European Court of Justice (ECJ) in the Air France-KLM case (VAT on no-shows for flights), as well as other cases, HMRC has changed the way VAT applies to cancellations from 1 March 2019. The new rules mean that hoteliers will be required to pay VAT on any advance payment not refunded, i.e. the accommodation provider has to pay VAT on any deposit which is retained.
What does this mean?
If you retain deposits for no shows or any other reason you now have to account for VAT on them. This applies from 1 March 2019.
Unfortunately, if you accounted for VAT on these deposits prior to 1 March 2019, HMRC will not make a refund. Their view is you applied the correct rules (even if HMRC would have told you this was incorrect at the time had you asked) and so no adjustment is allowed.
Is this correct?
It falls to interpretation – HMRC previously accepted there was no supply for VAT purposes. However, they now consider the payment gave you the right to enjoy a supply and that in itself is an event subject to VAT.
This principle does conflict with other case law from the ECJ. It is not free from doubt that HMRC have applied the correct interpretation.
Can I challenge this?
It seems likely that the policy will be challenged. There are sufficient grounds from other case law to do so. The issue is this may take a long time to progress through the courts and businesses will need to account for VAT in the interim period or risk penalties if the challenge is unsuccessful.
If the policy is reversed or found to be incorrect there will normally be a four year period to recover VAT that was not due. So there is a window before action needs to be taken.
The general approach by HMRC is becoming consistent – if money is paid then VAT is due, as you are paying for something.
We have seen this in respect of case law relating to car parking overpayments – VAT is due on the amount paid, not just the charge made on the tariff.
This is evidence of the importance of the ECJ in interpreting the VAT rules. It is unfortunate HMRC appear to be cherry picking the decisions they like and ignoring (or trying to distinguish) those they do not.
What should we do?
You must ensure you are applying the policy or challenge it. You must not ignore it. The issue is likely to be challenged – as this progresses the legal position will become clear.
If you have any queries or would like to discuss this topic further, please contact your local UHY adviser.
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