VAT treatment of Cancellation Deposits

The VAT reclaim provisions contained in s74(4) VATCA 2010 have been abolished with effect from 1st January 2022.

From 1^st January 2022, a key change in the Finance Bill 2021 has been introduced in relation to the VAT treatment of cancellation fees, including non-refundable or forfeited deposits, retained by business in the event of a customer cancellation.

Cancellation fees including forfeited deposits would be liable to VAT on the basis that they are either (a) a payment for a vatable service or (b) a right to access a vatable service. This is especially relevant to businesses in the tourism industry including hotels and restaurants.

In this amendment, it would appear that the Irish Revenue Commissioners are applying the CJEU judgements in:

1. Air France–KLM C-250/14 and Hop!–Brit Air SAS C-289/14 and
2. MEO C-295/17 and Vodafone Portugal C-43/19

They also appear to be following HMRC’s lead, which, with effect from March 2019, changed its legislation stating that VAT would remain due on retained payments for unused services and uncollected goods.

Prior to 1st January 2022 the Irish Revenue Commissioners had taken the view that if the supplier received a deposit from a customer that the deposit should be treated as an advance payment and VAT would be due when the deposit is received.  If, however, the supply didn’t proceed then the vendor/supplier could claim a repayment of the VAT on the deposit.  This was on the basis that the receipt of the deposit was not considered to be VATable because no supply of service had taken place.  In other words, prior to the amendment in the Finance Act 2021, if the actual supply didn’t proceed, the supplier or vendor could still claim a refund of VAT which it previously accounted for on receipt of the non-refundable deposit.

Pre 1st January 2022, a number of conditions were needed to apply:

1. the supply didn’t take place because the customer has cancelled it.
2. the cancellation was correctly recorded in the books and records of the supplier.
3. the deposit was not refunded to the customer.
4. the customer wasn’t given any other consideration, benefit or supply in lieu of that amount.

The Finance Act 2021 change has deleted from our legislation the previous entitlement of suppliers to reclaim a refund of VAT in respect of the non-refundable deposit, however, it does not affect the VAT treatment of deposits that are refunded to customers.  The VAT relief should still be available on those deposits.

For further information, please click: https://www.revenue.ie/en/tax-professionals/documents/notes-for-guidance/vat/vat-guidance-notes-fa2021.pdf

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.