VAT Update: Advance Payments
Sarah Verge - April 30, 2019
HMRC’s new policy on VAT relating to advance payments and deposits for goods and services not taken up by customers applies from 1 March 2019.
Following judgements of the Court of Justice of the European Union (CJEU), HMRC has reviewed the policy on the VAT treatment of payments for unfulfilled supplies. An unfulfilled supply is where a customer does not use a service, or collect goods, that they have paid for.
When a full or part-payment is made on account for a taxable supply, a chargeable event occurs, and VAT becomes due on the amount paid.
Until 1 March 2019, HMRC’s policy allowed businesses to treat many payments for services, and part-payments for goods, as outside the scope of VAT, if the customer did not use the service or collect the goods.
The new policy means that, if the supply does not take place, the VAT must not be reduced unless the payment is refunded. This is because, when a customer makes or commits to make a payment, it is for a taxable supply. This taxable supply cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.
A venue is booked on 7 January 2019 for a corporate event on 22 March 2019. The venue hire is £1,000 (excluding VAT) and the customer pays a non-refundable deposit of 15%, which is £150 plus VAT of £30. If the customer cancelled the venue hire booking before 1 March 2019, the venue can make an adjustment to treat the transaction as outside the scope of VAT, keeping the £30. If the customer cancels on or after 1 March 2019, the venue cannot make an adjustment and the £30 is still due to HMRC.
Handling VAT on advance payments and deposits:
Question 1: Is the advance payment or deposit related to a taxable supply of goods and/or services, such as room hire or catering? If yes, a VAT tax point is created at the earlier of the date the payment is received, or a tax invoice issued.
Question 2: Is the advance payment or deposit non-refundable? If yes, the output VAT remains due.
ArtifaxEvent’s sophisticated finance engine, built into the core application, is designed to help you handle refundable/non-refundable advance payments and deposits plus security/damages deposits correctly. Contact us for further information.
Always seek professional advice for your organisation’s particular situation.
If the supply does not take place, the VAT must not be reduced unless the payment is refunded.HMRC