On 1st March 2019, HMRC implemented changes to VAT rules on part and full payments for supply of products or services that are retained or non-refundable, where a customer does not take up the goods or service – from VAT free compensation to taxable consideration. Where a service is not used or goods are not taken up by the customer, these are known as ‘unfulfilled supplies’, and the changes will mean that VAT is payable before they’ve been delivered, even if those goods or services are declined or cancelled, for example, paying VAT on hotel deposits.
VAT UNDER THE CURRENT RULES TO 28 FEBRUARY 2019
Before the changes came into effect, when a customer made an advance payment or part payment for a future supply that is taxable, VAT became due at the time these stage payments or deposits were received. If the product or service was then later unfulfilled and it was initially agreed by both parties that the deposit or advance payment is non-refundable (known as ‘forfeited deposits’ in HMRC’s guidance), the business may treat the income as compensation and the previously declared VAT could be adjusted in the next VAT return.
NEW RULES ON VAT TREATMENT FROM 1ST MARCH 2019
Where a (non-refundable deemed) advance payment or part payment via an instalment is made by the customer on goods or services, the business accounts for VAT in the same way as the current rules. However, if the supply of that product or service is subsequently unfulfilled, the business is no longer able to make a VAT adjustment.
When you raise an invoice or receipt, or receive a payment before providing goods or services, this is now considered to be a tax point. The day the invoice is raised, or the payment received, whichever comes first, that becomes the date for which you will need to account for VAT. If the amount is refundable, including deposits taken on goods, and the customer receives a full refund on cancelling their order or booking, claiming VAT on advance payment is not necessary.
LAND RELATED EXEMPTIONS
VAT on advance payments for most goods and services is likely to be based on a standard rate.
There can be variations relating to rights linked to land, which is largely exempt from VAT except when the interest from the land or buildings is taxed.
WHY IS THE TREATMENT OF VAT CHANGING FOR ADVANCE PAYMENTS?
The change in policy has come about following the result of a Court of Justice of the European Union (CJEU) judgment in the linked cases of Air France-KLM and Hop!-Brit Air SAS. It was ruled that the retained income from non-refundable air tickets that were not used was in connection to a supply rather than being compensation, so there could be no subsequent VAT adjustment.
Providers of goods and services will need to ensure that they treat refundable and non-refundable deposits differently when making VAT payments. HMRC states that businesses that have not been making VAT adjustments to date will not be able to make retrospective adjustments, as HMRC considers the new rules to have always been the correct position.
For further advice on how changes to advance payments will affect you, please do not hesitate to contact our expert Corporate and Personal Tax team in Warrington on 01925 830 830 or call our Manchester office on 0161 905 1801.