VAT on Deposits and prepayments

VAT on Deposits and prepayments

HMRC have announced new rules from 1 March 2019 for handling VAT on deposits and prepayments or other payments received in advance of delivering goods or services. Read more here.

Prior to the change if a customer paid but then did not take delivery of goods or use the service then the payment could be treated as being outside the scope.

From March 2019, irrespective of whether the supply is delivered or consumed, VAT will remain due on the payment received.

The only way to reduce VAT paid is to make a refund to the customer. If any payments are retained by the supplier they cannot be treated as compensation, VAT will remain due.

The change followed CJEU decisions (Air France-KLM and Firin OOD) which made change inevitable.  The rules ought to have said that when a full or part payment is made on account for a taxable supply, the receipt of the payment is treated as a chargeable event with VAT due on the amount paid.

Later on, if the pre-paid supply does not take place, the VAT can only be reduced if the payment is refunded.  This is because when a customer makes or commits to make a payment, it is for a supply.  It cannot be reclassified as compensation once it is known the customer will not use the goods or services.

Somewhat unfairly to my mind, HMRC’s business brief says if a business always accounted for VAT on retained deposits or prepayments, adjustments cannot be made as they were actually getting it right all along.

Given that VAT should always be administered even-handedly this seems to be a distorted approach. Maybe one worth exploring if there are any significant sums involved.

If you’re ever not sure about anything to do with VAT, please give us a call. Remember sooner is always better.

Posted in Relief.