Consideration ― specific situations

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Consideration ― specific situations
  • Donations
  • Deposits
  • Grants
  • Gratuities, tips and service charges
  • Salary sacrifice
  • Fines and penalty charges
  • Capital contributions
  • Ex gratia payments
  • Rent-free periods
  • Subsidies
  • Disputes
  • Subject access fees
  • Warranties
  • Overpayments
  • Payments for unfulfilled supplies

This guidance note provides an overview of the VAT treatment of specific situations and whether the payment will be viewed as consideration. This note should be read in conjunction with the Supplies of goods, Supplies of services and Consideration guidance notes.

Donations

See the Grants, donations and subsidies guidance note.

Deposits

Deposits are generally viewed as taxable payments and VAT must be charged in the normal way. However, in certain situations, the deposit paid may be outside the scope of VAT. For example:

  • forfeited deposits prior to 1 March 2019 - these are not viewed as consideration for a supply because they are a payment for damages. For example, a deposit for a hotel room that is not used is treated as compensation even though the payment would originally be for advance consideration for the supply of the room and would be taxable if the customer had used the accommodation. However, if the booking is cancelled, the payment becomes compensation / damages for breach of contract and is therefore outside the scope of VAT
  • forfeited deposits post 1 March 2019 - if VAT has been accounted for on an advance payment (deposit) received from a customer, VAT cannot be reclaimed if the customer subsequently cancels the booking and the business retains the deposit. The output VAT paid can only be reclaimed if the business refunds the advance payment to the customer. There are transitional provisions in place and 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 reclaimed, even if the supply was due to take place after 1 March. However, if the payment was taken before 1 March 2019

More on Supplies, consideration and valuation: