Accounting for VAT on advance payments and deposits from 1 March 2019

As announced in the Autumn Budget there is a change in the VAT treatment of deposits that takes effect from 1 March 2019.

When is VAT due on a deposit?

If an advance or down payment is made in respect of a supply of goods or services then the normal tax point rules apply.  The business must account for output VAT (as applicable) on the deposit on the earlier of issuing a VAT invoice and receiving the payment.

In the normal course of events the sale is completed and VAT is accounted for on the balance of the amount due.

Note that VAT is not due on returnable security deposits such as breakages deposits on holiday accommodation.

What if the sale is cancelled?

If the sale is cancelled before the goods or services are delivered the business may refund the deposit to the customer and reverse the VAT accounted for on it.  Before 1 March 2019 if the business is contractually entitled to keep part or all of the deposit on a cancellation it can still reverse all the VAT.  This is because the retained deposit is regarded as compensation, which is outside the scope of VAT.

From 1 March 2019 businesses will not be able to reverse the VAT on a deposit in the event of a cancellation unless the deposit is refunded to the customer.

No retrospective adjustments  

HMRC state that this has always been the correct treatment and so businesses cannot now adjust VAT on transactions before 1 March 2019 if they have already been accounted for by reversing the VAT.  However, if, before 1 March 2019, cancelled deposits have been retained and accounted for as compensation no adjustment will be required.

If you have any queries regarding this please contact us.