Previously, if a non-refundable deposit was taken and the goods and services weren’t used by the customer, the deposit could be re-classified as ‘outside the scope of VAT’ (e.g compensation) and therefore this deposit was VAT free. However, in HMRC’s Revenue and Customs Brief, they outline the changes to their policy on VAT and payments for unfulfilled supplies; HMRC now say these deposits are subject to VAT. From 1 March 2019, HMRC’s policy will be that VAT is due on all retained payments for unused services and uncollected goods, and they will resist any attempt to reclassify such payments.
Their objective appears to be ensuring that where a business has charged VAT on a pre-payment, but doesn’t fulfil the supply, no subsequent adjustment can be made to the VAT on this deposit. There is however, very little technical background in the Revenue and Customs brief (RCB) and it remains to be seen whether this blanket policy will be challenged in particular cases.
We are advising all taxpayers, who currently treat retained deposits as outside the scope of VAT, to review their position before 1 March 2019 to check how they will be affected by the new policy. If you have any uncertainty as to how you could be affected, please contact us for more information.