VAT Treatment (Services that did not get supplied)

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yorkshirejames

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Mar 2, 2006
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  • #1
    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?
     
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    Zeno

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    Jun 12, 2008
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  • #4
    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.
     
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    yorkshirejames

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  • #6
    Zeno said:
    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.
    Click to expand...

    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.
     
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    Zeno

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  • #7
    yorkshirejames said:
    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.
    Click to expand...

    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.
     
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    3pic

    3pic

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    Jun 20, 2007
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  • #8
    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?
     
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    3pic

    3pic

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  • #9
    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.​
     
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