Hotels which have accounted for VAT on deposits for “no show” reservations could be in line for a VAT refund going back four years, thanks to a ruling in the European Court of Justice. The ruling, which upheld a French hotel operator’s appeal against an assessment by the French tax authorities, means that where a customer cancelled, or simply did not take up the booking after making a reservation, no supply was made by the hotel to the customer for VAT purposes, unlike the normal charge for room hire which is subject to VAT at the standard rate.
HMRC has recently amended its guidance and now accepts that a deposit that is retained in the event of a contract for a room being cancelled, represents a compensation sum and not sales income. This makes the sum received outside the scope of VAT.
The revised policy will also apply where a booking has been taken, and deposit paid, but the guest then stays for less time than they booked for.
However HMRC will still take the view that VAT is due if a deposit relates to a specific type of room being reserved (e.g. a ground floor room, or a room held vacant as a guaranteed booking).This is because HMRC considers that a guaranteed reservation granted for an optional payment is a taxable supply.
As well as hotels the ruling also affects any other form of serviced accommodation and holiday accommodation.
If your business accounts for VAT on a cash basis, you are likely to have declared VAT on your deposits at the time they are received. If the guest subsequently fails to turn up, or cancels their holiday, and the deposit was retained, then this VAT can be recovered. You do need to act quickly as there is a four year time limit for back dating claims. This ruling does not change the position regarding deposits paid by customers who actually complete their stay at the Hotel. Vat will still apply on these deposits in the normal way.
Therefore it may be worth a review of your bookings and business records over the last four years to see if you declared VAT on any withheld deposits. If you have, then you will be able to reclaim the VAT element of this deposit.
For the future, VAT will still need to be declared on all deposits at the time they are received. Businesses should then reclaim the VAT element of any deposits withheld if the booking is subsequently not taken up.