VAT changes to unfulfilled prepayments and deposits – What you need to know

Hillier Hopkins LLP

Chartered Accountants & Tax Advisers

Call +44(0)330 024 3200 and discover how we can help you.

Changes announced in the 2018 Budget means, from 1 March 2019, all VAT charged on prepayments or deposits will have to be paid over to HMRC, even if the customer does not collect or use the product or service, also known as unfulfilled supplies.

The 2018 Budget specifically looked at this area to bring consistency to the VAT treatment of non-refundable prepayments or deposits. It could mean that some business owners will face a higher VAT payment than in previous years, especially in sectors where prepayments of “no shows” are often retained, such as the hotel industry, or where deposits are taken on products long before the product is actually delivered, such as car dealers. A Revenue and Customs Brief was published by HMRC on the 14th of December 2018 to further clarify the changes. In this article we’ll look at:

  • The current VAT treatment of retained payments on unfilled supplies or products.
  • What the changes are and how it can affect you.
  • Clarifying examples.

The current VAT treatment of retained payments on unfulfilled supplies or products

As it stands, the VAT treatment of payments and part payments on unfulfilled supplies of goods and services fall outside of the scope of VAT. That is, when a customer does not use a service or collect goods that they have already paid for (and there is no refund), the supplier that collected the VAT on that prepayment, does not then pay over the VAT to HMRC because a taxable supply did not actually take place.When the customer qualifies for a refund, they get the full amount back, including the original VAT charge, so there is no imbalance between VAT collected and paid over to HMRC.
However, as stated in the Brief, following judgements of the Court of Justice of the European Union (including Air France and Firin OOD), HMRC felt it necessary that the policy should be reviewed and the current treatment should be amended.

What the changes are and how it can affect you

HMRC found that when a full or part payment is made on account for a taxable supply, a chargeable event occurs at the point of payment and VAT becomes due on the amount paid.

If the customer ends up not using the service or collecting the product, the VAT portion is still payable to HMRC, as long as there is no refund due. HMRC’s reasoning is that when a customer commits to making the payment, it is with the intention of paying for a taxable good or service. This cannot be reclassified to a payment to compensate the supplier for a loss (which doesn’t carry a VAT charge) when it becomes clear the customer will not use the goods or service.

The change will come in to effect on all retained payments from 1 March 2019 for unused services and uncollected goods. No adjustments or VAT refunds will be allowed for those types of retained payments. It means that if you are in an industry where this is a common occurrence, your payable VAT to HMRC may very well be higher after this policy comes into effect than in previous periods.

If suppliers become aware that the goods or services will not be used or collected before the policy effective date (1 March 2019), then the prepayment can still be treated under the current policy.

Clarifying examples

The Brief outlines a good example of how this policy change could affect suppliers. If a customer books a hotel room for a specific date in the future, usually the hotel or agent will take an advanced payment (or pre-payment) at the time of booking.

The customer is not entitled to a refund when they don’t show up or cancel the booking after a certain time close to the actual date.

The hotel will account for the VAT when they receive the payment from the customer. If the customer cancels or does not use the room for whatever reason, the VAT cannot be adjusted or retained under the new policy. 

However, if the cancellation or “no show” is before 1 March 2019, the old policy will still be in effect and the VAT account will be adjusted.

Another common scenario may be where a car dealer takes a non-refundable deposit on a car while the customer is being vetted for the Motability Scheme, for example (an affordable, worry-free way for people with disabilities to lease a car for their mobility allowance). If the lease is not approved under the scheme or the customer pulls out of the deal before the car is delivered and the final payment is made, the VAT charge on the non-refundable deposit received in advance is still payable to HMRC.

If you want to find out more about how, and if, the policy change might affect your VAT payments and reconciliations, please get in touch with us. Ruth Corkin or one of our other VAT experts will be happy to help.

Do you need extra information?
Ruth Corkin

Ruth has been involved with VAT for over 30 years. She started her VAT career as a Customs and Excise Officer in Essex and then moved into consultancy with a variety of well-known accountancy firms. She is well known in the VAT world and is the proud author of many articles and technical works.

Contact Ruth at ruth.corkin@hhllp.co.uk or on 01908 713 860