Supply and consideration ― unfulfilled supplies, compensation and fines

Produced by Tolley
Supply and consideration ― unfulfilled supplies, compensation and fines

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

  • Supply and consideration ― unfulfilled supplies, compensation and fines
  • Unfulfilled supplies
  • Retained deposits which are not unfulfilled supplies
  • Compensation and similar payments
  • Fines and penalty charges
  • Excess charges for car parking
  • Practical points ― unfulfilled supplies, compensation and fines

This guidance note looks at the following areas of VAT:

  1. unfulfilled supplies

  2. compensation and similar payments

  3. fines and penalty charges

For an overview of supply and consideration generally, see the Supply and consideration ― overview guidance note.

For in depth commentary on the legislation and case law in this area, see De Voil Indirect Tax Service V3.104.

Unfulfilled supplies

Broadly, HMRC has suggested that an unfulfilled supply is where a customer does not use a service or collect goods that they have paid for.

A typical example of an unfulfilled supply is a hotel ‘no show’ or cancellation where the hotel retains the deposit for the room even though the room is never used by the customer.

Prior to 1 March 2019, HMRC allowed businesses to treat many payments and part-payments for goods and services as outside of the scope of VAT, where the customer either did not use the services or collect the goods. This was on the basis that there wasn’t the necessary link between the payment and any supply made in return.

With effect from 1 March 2019, HMRC revised its policy. It now takes the view that VAT is due on all supplies of unused goods and services that are not collected / used where the customer has paid for the supply in question. Consequently, no adjustments or VAT claims will be permitted if the supplier retains the payment received and VAT can only be adjusted where the supplier issues a refund to the customer.

HMRC’s policy change came in response to some European case law developments. For example, in one CJEU case, it was held that payments for non-refundable air tickets which were not actually used was still consideration for a supply for VAT purposes.

However, it is worth noting that in an earlier European case, the CJEU had also found that a hotel’s retained deposit was not consideration for a supply when a customer exercised its option to cancel its booking.

See also

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