One of the most common questions we get asked from our hospitality clients (or alternatively one of the more common areas we find errors in the sector) is around the VAT treatment of deposits. In this article, we summarise the VAT rules around how and when to account for VAT on the receipt of deposits.

VAT on Deposits
The VAT definition of deposits is pretty simple – deposits are payments made in advance by customers to secure goods or services. They can be refundable or non-refundable, depending on the terms agreed upon between the business and the customer.

When a business receives a deposit, it must account for VAT at the time the deposit is received or when a VAT invoice is issued, whichever comes first. This creates a tax point, which is the date on which VAT becomes chargeable.

Types of Deposits and Their VAT Treatment

1. Advance Payments and Deposits:
   • These are partial payments made before the delivery of goods or services. VAT is due on the advance payment at the time it is received or invoiced.
2. Returnable Deposits:
   • If a deposit is refundable upon the return of goods (e.g., rental equipment), VAT is not charged unless the deposit is forfeited due to loss or damage.
3. Forfeit Deposits:
   • If a customer decides not to proceed with the purchase and the deposit is non-refundable, VAT remains due on the deposit.
4. Continuous Supplies:
   • For services provided on a continuous basis, VAT is accounted for each time a payment is received or an invoice is issued.
5. Hotel Accommodation:
   • Specific rules apply to deposits for hotel bookings, where VAT is due at the time the deposit is received.

Adjustments and Refunds
If a transaction is cancelled and a deposit is refunded, the business may be able adjust the VAT previously accounted for to reflect the amount refunded. However, if there is no refund, there can be no adjustment for the VAT accounted for in the deposit – even if after cancellation the room or reservation is re-sold to another customer. As a result, any retained deposits or “no-show charges” will be subject to VAT.  Any amount paid on account is consideration for your customer’s right to benefit from the supply, regardless of whether the customer exercises that right.  When the payment is taken it creates a chargeable event and VAT becomes due. This payment cannot be retrospectively re-characterised as an outside the scope compensation payment.

Consequences
If you have not been, or have been incorrectly, accounting for VAT on deposits, HMRC can assess for under-declared VAT.  Whilst in most situations, this will only be a timing error on the basis that VAT is accounted for on the full value of the reservation when it happens, in cases of no-shows an absolute amount of VAT may not have been declared.  If this is the case HMRC may seek to levy penalties and interest in addition to the VAT under-declared.

Conclusion
Understanding the VAT rules on deposits helps businesses ensure compliance and manage their tax liabilities effectively. By correctly accounting for VAT on deposits, or by voluntarily declaring under-declared VAT to HMRC, businesses can avoid potential penalties and maintain accurate financial records.

If you’d like to discuss any of the above or consider how these rules impact your VAT accounting, please don’t hesitate to contact or VAT partner, Dougie Todd or alternatively speak your usual VAT contact.