Change to VAT treatment of deposits taken by hotels from 1 March 2019

February 26th, 2019     Tax News

At the moment hotel owners are able to reclaim the VAT on deposits paid by customers who lose their deposits due to cancelling a booking, on the basis that no supply has taken place.

The change from 1 March 2019 is, where a hotel retains a deposit from a cancellation it will no longer be able to reclaim the VAT. VAT can now only be reclaimed where a deposit is refunded to a customer. This also affects amounts that customers were contractually obliged to pay on a future date. For example, if a customer had agreed to pay £300 and then cancelled, VAT is payable on the deposit on the basis the customer had contractually obliged to pay for a supply.

If a payment had been made by a customer before 1 March 2019 and the customer cancels before 1 March 2019 then the VAT can still be reclaimed, even if the stay was due to take place after 1 March 2019. However if the cancellation is made after 1 March 2019 the new rules will apply.

An example of this:

A hotel room is booked on 4 January 2019 for a one night stay on 17 March 2019. The price is £100 plus £20 VAT. The hotel takes payment at the time of booking. The customer has no entitlement to a refund in the event of them cancelling or not using the room.

The hotel must account for the VAT when the payment is first made.

If the customer cancels the booking before 1 March 2019, the hotel may make an adjustment and treat the £20 VAT as outside the scope of VAT.

If the customer cancels on or after 1 March 2019 or does not use the room, the hotel cannot adjust the £20 VAT as the new policy will apply.

This means that from 1 March 2019 hotel and guesthouse owners will have to pay VAT on all cancellations, where no VAT has been payable previously. They will need to ensure they have reviewed their treatment of deposits to comply with this change.

If you are a client of Andrew Price & Co, we will have already informed you of this change and will ensure the deposits have been treated correctly on review of your VAT return.

Please call Annette Dillon for further detailed advice specific to your circumstances on 01803 296678.