Prepayments and Non-refundable Deposits

VAT Question

We are still getting many questions on the Vantage VAT helpline relating to the changes which came in on 1st March 2019 relating to non-refundable deposits. From what date did this apply?

VAT Answer

From1st March 2019, VAT is now payable on all non-refundable advance payments received for goods or services, even if the customer decides at some later point in time that they wish to cancel or they do not show up.

Previously businesses may have reduced their output VAT in the event of a cancellation on the basis that they had supplied neither goods or services and they might have treated this income as outside the scope of VAT (OSS).

An example of a service to illustrate this could be a customer paying a non-refundable deposit to reserve a table at a restaurant and they did not turn up.

An example of goods could be a non-refundable down payment made by a customer for say custom made furniture and then they changed their mind and cancelled the order.

In both the above examples, after 1 March 2019 the VAT treatment of the non-refundable deposit remains taxable and the non-refundable deposits received remain VAT inclusive.

Please note that these changes only apply to non-refundable deposits or part payments. If the advance payment is refundable then no output VAT is payable when this type of deposit is made or refunded to the customer.

Can I make an adjustment to a prior period?

If the old rules were not applied in previous VAT periods, you are not allowed to retrospectively make any adjustments or claims related to those prior periods as HMRC deem the law has been applied correctly.

If you previously treated supplies of unfulfilled goods or services before 1st March 2019 as OSS then HMRC have agreed there is no requirement to make any correction.

The date of cancellation is the key date to bear in mind. If the customer cancels an order or does not turn up before 1 March 2019 then OSS can apply. However, if the cancellation or no show occurs after 1st March 2019 then no adjustments or refunds of VAT will be allowed on these retained payments.

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