Whether there is VAT on deposits has been catching a lot of people out in recent years. This is particularly pertinent to the hospitality and property rental industries.
In this guide we will look to address questions regards VAT on commercial rent deposits, in hospitality, and the rental market. Scroll down until you find the answer relevant to your VAT query.
VAT on deposits guide
The rules on there being VAT on deposit fees will differ depending on whether you offer customers payments in advance, instalments, deposits, or credit sales. Confusing enough already.
So, are you taking a deposit and if so when is there VAT on that deposit?
The first thing we need to establish is the tax point. This is the point at which HMRC determine that the sale of goods or the supply of services has taken place. The point at which you should be reporting VAT. There are different types of tax points, and you’ll need to make sure you get this right to understand whether there is VAT on deposits.
We are sure you have better things to do than work through the fine detail to ensure you account for VAT on deposits correctly. So, if you have ever been left scratching your head wondering ‘is there VAT on deposits?’ here’s a simple answer:
Prior to 2019 HMRC’s interpretation was that you were allowed to keep some non-refundable deposits as VAT-free compensation. This changed from 1 March 2019 where VAT is due on a deposit even if the customer does not use the goods or service for which it paid.
There are many considerations on whether there is VAT on deposits. The main one is the type of transaction and then the tax point of that transaction. Stick with us through this guide on whether there is VAT on deposits, and we will walk you through the various scenarios.
Is there VAT on deposits?
An advance payment, or deposit, is a proportion of the total selling price that a customer pays before you supply them with goods or services.
The tax point will be either the date you issue a VAT invoice for the advance payment or the date you receive the advance payment, whichever happens first.
You include the VAT due on the advance payment on your VAT Return for the period when the tax point occurs.
If the customer pays you the remaining balance before the goods are delivered or the services are performed, a further tax point is created. This will be either when you issue a VAT invoice for the balance, or when you receive payment of the balance, whichever happens first.
You then include the VAT due on the balance on the return for when the further tax point occurs.
Forfeit deposits
If you ask your customer for a deposit against goods or services, you will supply them at a future date.
You must declare VAT on the deposit when you receive it, or when you issue a VAT invoice, whichever happens first.
If you keep a deposit if your customer decides not to take up the goods or service, VAT remains due on the money you have received.
If you use the cash accounting scheme, you’ll account for the VAT when you receive payment from your customers unless it’s a returnable deposit.
What is the VAT rate on deposits?
The rate of VAT on deposits follows the same treatment as the goods or services that you will supply at a future date.
Is there VAT on rent deposits?
Residential landlords and residential rents are exempt from VAT and so are unaffected by VAT on rent deposits.
There are different rules for VAT on property deposits depending on the given circumstances.
For example, it is common for a contract for the sale of the freehold interest in land to require the payment of a deposit by the purchaser at the time contracts is exchanged.
This may be payable either directly to the vendor or to a solicitor acting as the vendor’s agent. In either case, receipt of the deposit creates a tax point for the vendor under section6(4) of the VAT Act 1994 (see VATTOS2225), to the extent of the amount received.
Alternatively, the contract may specifically provide for the deposit to be received by a third party (again this can be the vendor’s solicitor) acting in the capacity of a stakeholder. Under these arrangements, the stakeholder will hold the money on behalf of both parties, pending the satisfactory performance of the contract.
It is accepted that, in these circumstances, the payment cannot be said to have been received by the vendor for VAT time of supply purposes, until it is eventually released by the stakeholder.
Is there VAT on commercial rent deposits?
The general rule for commercial landlords is that there is no VAT on property deposits since the landlord has made no supply at that date. It is only if a deduction is made from those deposit monies that a taxable supply is made.
Are rent deposits VAT exempt or zero-rated?
Residential landlords and residential rents are exempt from VAT and so are unaffected by VAT on rent deposits.
For commercial property, if the landlord has opted to tax a property VAT is due on the rent at the standard rate of VAT. It is common practice to include an amount equivalent to VAT on top of the deposit sum. At the point of payment, this is outside the scope of VAT as no supply has been made.
Do you charge VAT on security deposits?
Whether you charge VAT on security deposits is determined by the lease. It would normally be an amount equivalent to VAT as a supply has not yet been made. A rent deposit is a security deposit for an amount perhaps say three months and VAT.
Generally, there has been no vatable supply and the VAT element is not reclaimable. This is not unusual. If a tenant defaults on any payment of rent the deposit gets used to settle the rent at which point, there is consideration of a supply.
So, you cannot account for the VAT on an invoice and there is no VAT for the tenant to reclaim. It is purely a mechanism for the landlord to be able to reclaim the rent in full and account for VAT correctly if the tenant defaults on the rent payments.
Whilst in general the tax point for a deposit becomes the point at which payment has been made that is not the case with security deposits.
- VATTOS5120 provides guidance on this matter:
With the exception of security deposits (see VATTOS5135), a pre-payment or deposit intended by the payer and recipient to eventually form part of the consideration for an identifiable supply, will create a tax point under section 6(4) of the VAT Act 1994 (see VATTOS2225).
However, it should be noted that the requirement for the potential supply to be sufficiently identified follows from the ECJ decision in the case of Bupa Hospitals Ltd/Goldsborough Developments Ltd (C-419/02).
Is there VAT on hotel deposits?
There is separate guidance on VAT on deposits from HMRC in the form of VAT Notice 709/3.
This specifically covers VAT on holiday accommodation, caravans, and camping facilities.
Most deposits serve as advance payments, and you must account for VAT in the return period in which you receive the payment. The payment is the tax point.
If you retain a deposit for a booking that your customer fails to take up VAT remains due.
Example VAT on hotel deposits
A customer books a hotel room in advance and, at the time of booking pays £100, the full price of the room. The customer cancels or fails to turn up and, in accordance with the booking terms, the hotel keeps the full amount of the payment.
VAT is due on the £100. Payment is made in advance for a service that is to be supplied at an agreed point in the future. VAT becomes due when the payment is made. It cannot be reclassified later if the customer does not take up the room.
If the payment were 50% of the agreed price, in this instance £50, then VAT is due on £50.
The VAT accounted for may only be reduced to the extent that the supplier refunds the payment to the customer.
Credit card guarantees and VAT
Where credit card details are taken, but no charge is made until the services are due to be used, VAT is due when the payment is taken.
Similarly, any other forms of payment for a future supply that the customer is obliged to make at a future date will be subject to VAT if the supply is unfulfilled.
Example
A customer books a hotel room in advance. No payment is taken. Instead, a commitment to pay the full agreed price (possibly accompanied by an authorisation to take the payment from a credit card) is given by the customer and will become payable whether the room is used or not. The customer cancels or fails to turn up and the customer’s credit card is charged £100.
The £100 is taxable.
Similarly, if the customer commits to only pay 50% of the agreed price, then VAT will be due on 50% of the price, in this instance on £50.
FAQs about VAT on deposits
Is advance payment subject to VAT?
An advance payment, or deposit, is a proportion of the total selling price that a customer pays before you supply them with goods or services.
The tax point will be either the date you issue a VAT invoice for the advance payment, or the date you receive the advance payment, whichever happens first.
You include the VAT due on the advance payment on your VAT Return for the period when the tax point occurs.
If the customer pays you the remaining balance before the goods are delivered or the services are performed, a further tax point is created. This will be either when you issue a VAT invoice for the balance, or when you receive payment of the balance, whichever happens first.
You then include the VAT due on the balance on the return for when the further tax point occurs.
Are refundable deposits vatable?
You may ask your customers to pay a deposit when they hire goods from you. You do not have to account for VAT if the deposit is either:
- refunded in full to the customer when they return the goods safely
- kept by you to compensate you for loss or damage
Read guidance manual VATSC05820 for more detailed information on the treatment of deposits for the supply of goods or services.
Section 7 of VAT Notice 709/3 explains the VAT treatment of deposits for hotel accommodation (see above for examples of VAT on hotel deposits).
Conclusion
As a rule, there is VAT on deposits where the deposit is non-refundable.
There are different rules for different industries and types of supplies so as normal with the UK tax system you need to get familiar with the rules that apply to your given circumstances. This is where you need to lean on your accountant or bookkeeper for guidance. They should be able to decipher the UK tax system legislation a bit easier than you and keep on top of any legislative changes that might affect the way you operate your business.
Many businesses have been caught out by changes or certainly clarification to legislation back in 2019. There was a lot going on then so people may have missed ‘changes to the VAT treatment of retained payments and receipts’ briefing.
This resulted in HMRC resetting the button on whether VAT is due on deposits from 1 March 2019. If you have not kept on top of these changes then we would highly recommend you review your current Vat treatment of deposits, especially those in the hospitality sector. Check your terms and conditions on cancellations and no-shows.
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Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
