The VAT treatment of deposits taken by hotels is changing from 1 March 2019.
At present, if a guest pays a deposit for a room but loses the deposit as a result of cancelling the booking, the hotel has been able to reclaim the VAT paid on the deposit on the basis that no supply will now be made to the guest.
The new treatment from 1 March 2019 is that where VAT has been accounted for on an advance payment made by a customer, this VAT can no longer be reclaimed if the customer cancels the booking and the hotel retains the deposit. The VAT accounted for can only be reversed to the extent that a refund is made to the customer.
The new treatment also applies to amounts which the customer has contracted to pay on a future date – for example if a customer had agreed to pay £500 for a hotel stay and cancelled at a point which meant they were contractually obliged to make the full payment, then that payment would also be subject to VAT on the basis that they had contracted to pay for a supply which was subject to VAT.
There are some transitional provisions which mean that if a payment had been made before 1 March 2019 and the customer cancels before 1 March 2019 then the VAT accounted for can be reversed, even if the stay was due to take place after 1 March; but if the payment was taken before 1 March 2019 and the customer cancels after that date then the new VAT treatment will apply and VAT already accounted for cannot be reversed.
Hotels and guesthouses will need to review their treatment of deposits to make sure that they are treated correctly after 1 March 2019.