VAT Treatment (Services that did not get supplied)

[yorkshirejames]

Folks,

Wonder if someone can help me, I'm trying to remember something from the depths of my past, and struggling.

What is the general situation where (and I shall use an analogy) someone enters into a contract to rent a hotel room, then cancels (in good time), but that the supplier makes a charge as they are unable to resell the room?

Something tells me that if the cost was £117.50 inc VAT that the hotellier can only charge £100.00, on the basis that it is outside the scope of VAT as no 'service' has been supplied.

The above is purely an analogy - my question concerns a scenario where there is no way at all to assert that services have been supplied.

Am I getting totally confused?

[Zeno]

Am I getting totally confused?

I believe so. I was not aware that if the services were actually supplied or not had any bearing on the VAT.

[yorkshirejames]

Found something - http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000166&propertyType=document section 7.

Could Mr. Zeno take a look at this for me please?

[Zeno]

In the case of hotels, the cancellation charge is not in respect of services - it is essentially compensation for breach of contract and not a taxable supply.

But if we are not talking about hotels, what use would this be to you?

For example, if you pay me £500 to prepare accounts for you that you then decide you don't want and I get to keep the £500, I am pretty certain that that this would still represent a taxable supply.

[Zeno]

And now the VAT experts are going to prove me wrong by kicking my arse with their superior knowledge and making me look an edjit.

[yorkshirejames]

And now the VAT experts are going to prove me wrong by kicking my arse with their superior knowledge and making me look an edjit.

No - you are not an eedjiet - you are helping with my question, which is more than anyone else has done as of 12:15 today.

Your analogy (I pay for your accounting services, and then cancel before you've done anything) is a good analogy of the scenario. I would be interested in peoples' opinions of this scenario and its VAT treatment - and in particular any guidance I can print off.

[Zeno]

No - you are not an eedjiet - you are helping with my question, which is more than anyone else has done as of 12:15 today.

Your analogy (I pay for your accounting services, and then cancel before you've done anything) is a good analogy of the scenario. I would be interested in peoples' opinions of this scenario and its VAT treatment - and in particular any guidance I can print off.

My thinking is that in my example, the £500 is not directly identified as a "cancellation charge" unconnected with the original supply.

The only refeference I can find to anything similiar is in relation to hotels.

[3pic]

No arse kicking Zeno!!;)

If a deposit (or pre-payment) has been made which then does not lead to a supply taking place, then VAT shouldn't be due. The hotel argument is on the basis that no supply has occured and the charge made is a penalty fee, thus no supply as such and so not subject to VAT.

In Nigel Mansell Sports Co Ltd [1991], the company sold Ferrari sports cars and due to the limited availability of them, the company asked prospective customers for an initial deposit of about £5,000.

On receipt of a firm order the customer was asked to increase the deposit to ten per cent of the car value. HMRC argued that VAT should be accounted for on the initial deposit (£5,000), but the tribunal decided that this was incorrect: the initial deposit neither related to any definite supply nor created any contractual relationship. It was merely ‘an agreement to make an agreement’. This apparently suggests that there must be a clear contractual relationship in order for a deposit to create a tax point. In the absence of such, arguably a tax point has not been created by the payment of a deposit.

So without very specific details from the YJ cannot really say either way. It s suggested there is "NO WAY" to assert that a service has been carried out, which begs the question why pay for something you cannot prove you provided as the supplier or prove receipt of as the customer?

[3pic]

Managed to find this from a PWC article on the subject :-

"Essentially, when a business receives a deposit (being an advance payment in respect of a supply of a taxable good/service) from a customer, the business is obliged to account for VAT on receipt
of same.

However, where the supply does not subsequently take place as
a result of the customer’s cancellation and the deposit is not refunded, the business may reclaim the VAT previously accounted for on the deposit. The same VAT treatment also extends to a cancellation charge levied by a business where the supply does not proceed".

VAT is generally applied where there has been consideration in return for a supply of something. Depending upon what the supply was determines the rate of VAT charged. But if you get consideration but no supply is made (ie, a donation freely given) then it is not subject to VAT. A bit like business gifts, if you give away an item less than £50 then no VAT is due on the 'sale/giveaway' as although there was a supply, there was no consideration.

[yorkshirejames]

3pic, thank you. Would it be okay to PM or email you the actual scenario? I'd rather not post it in the open forum.

[3pic]

3pic, thank you. Would it be okay to PM or email you the actual scenario? I'd rather not post it in the open forum.

No probs, PM me and I'll try and figure it out

[yorkshirejames]

Thanks - sent