Latest regulatory updates

Last updated 7th June 2019Kurt Janson

Kurt Janson, Director of the Tourism Alliance, gives a monthly update on the latest regulatory changes affecting the hospitality industry. 

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HMRC changes VAT treatment of deposits

HMRC has made a change to the VAT rules that apply when a guest cancels a booking and you retain their deposit as a result.

Up until now, HMRC allowed businesses to reclaim the VAT component of deposits where the customer cancelled a booking or was a “no show”.  This policy was based on the 2007 judgment of the European Court of Justice that, in these circumstances, the accommodation operator had provided no service to the customer and, as such, there was no VAT payable.

As a result of this judgement, HMRC’s guidance has stated that a cancellation charge for a hotel room is outside the scope of VAT.

However, HMRC has now published a new policy regarding the VAT treatment of deposits. This policy states that when a customer makes or commits to make a payment, it is consideration for a supply of goods or services and is therefore subject to VAT.

This new policy is based on recent European Court of Justice rulings including one against Air France/KLM, where it found that VAT must be paid on unused airline tickets because the customer had purchased the right to use the service, not the service itself.

It is important to note that a distinction is being made here between deposits and cancellation changes. A deposit is being classified as a payment for the right to use a service (which means VAT is payable) while a cancellation charge is compensation for loss (which means that VAT is not payable).

While in the past, the retention of booking deposits was seen as being compensation to the accommodation owner if a guest cancelled or did not arrive, HMRC is now saying that deposits cannot be automatically reclassified as compensation payments. However, it is also worth noting that this new policy does not apply to fully refundable deposits paid as security, rather than as a part payment for the service or goods.

Therefore, you should review your current VAT treatment of deposits and your terms and conditions on cancellations and “no shows” to determine whether they will be affected by HMRC’s new policy.

Read more information your legal obligations regarding cancellations and no shows.