HM Revenue & Customs ("HMRC") have
recently updated their guidance and practice so that VAT can now be
reclaimed on deposits paid for "no show"
reservations. Hoteliers should therefore be trawling through their
business records over the last four years to find such deposits in
order to reclaim the VAT. The clock is definitely ticking!
What was the position prior to the change in
practice?
Most deposits are advance payments on which VAT must be
accounted for in the return period in which they are received. Only
when a deposit was refunded to a guest could VAT accounted for be
reclaimed. In the recent decision of Société
Thermale d'Eugénie-les-Bains v
Ministère de l'Economie, des Finances et de
l'Industrie (ECJ Case C-277/05), the ECJ ruled that if a
hotel reservation is cancelled the deposit that has been received
by the hotel is outside the scope of VAT as it is deemed to be
compensation for the damage suffered by the hotel as a result of
the cancellation by the potential guest. There is no link between
the payment and a supply of services.
As a result of this ECJ decision, HMRC have recently amended their
guidance.
What changes have HMRC made?
HMRC have amended their guidance so as to accept that any VAT
accounted for in respect of a deposit that is retained in the event
that the guest makes a reservation but does not take up the
reservation is treated as compensation for the person breaching the
contract and therefore is outside the scope of VAT. This
also applies when a guest makes a reservation for a period of time
but then stays for less time than they booked.
Many hoteliers will have accounted for VAT on this deposit when
received. Therefore if the guest fails to turn up or cancels the
booking, this VAT can then be recovered. It is likely that there
will be a timing difference between when the VAT is paid and when
it is recovered due to guests making reservations far in advance
and paying the deposit at this time.
However HMRC have made it clear that where VAT is paid in respect
of a deposit to secure either a specific room i.e. an identified
room is being kept vacant for a guest, or a specific room type, the
hotel will not be able to recover this VAT as this is considered a
payment for a supply of services.
What action do you need to take?
You need to act quickly! There is a four year time limit on back
dating claims. Therefore it will be a worthwhile exercise to look
through your records for the past four years to determine whether
VAT was accounted for to HMRC on any deposits which were later
forfeited and if so, this VAT should be able to be reclaimed.
Going forward, VAT will still need to be accounted for to HMRC when
the deposit is received from the guest but in the event that the
deposit is retained in the circumstances detailed above, hoteliers
should be able to reclaim this VAT accounted for from HMRC. In
practice this should not be problematic for hoteliers but is
another matter for the hotelier to monitor.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 20/05/2011.