Securing your transactions

18th February 2019

Current position

HMRC have long accepted that hotels may treat non-refundable payments or part payments for services that are not fulfilled (ie deposits for cancelled room reservations) as outside the scope of VAT.

So, a hotel that takes a non-refundable deposit of £50 plus £10 VAT for a room may, if a customer cancels the reservation, currently reclassify the payment as compensation to the hotel for a loss (and treat it as outside the scope of VAT). In that scenario, the hotel would retain £60 and no VAT is due to HMRC.

Our hotel and hospitality sector clients should prepare for the change on 1 March 2019

New Policy

From 1 March 2019, where it becomes clear that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for any retained payments.

So, in our example above, HMRC will no longer permit any reclassification or refund of the VAT. The hotel would retain £50 and pay £10 VAT to HMRC.

What this means for you

Our hotel and hospitality sector clients should prepare for the change on 1 March 2019 by:

  • checking the terms and conditions of deposits in cancellation/no-show events and current VAT treatment to ascertain whether this change in policy will impact on them. As HMRC's change in policy was driven by a review of European VAT case law it will be important to review the contracts in the context of that case law
  • analysing the financial impact this change may have for them and any potential increase in output tax payable to HMRC
  • changing any VAT accounting procedures not in line with the new policy by 1 March 2019
  • considering whether any change to internal policy is required


For more information and to find out how this may impact your business, please contact Giles Salmond or Charlotte Stodell.

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