HMRC has confirmed a change in guidelines, which came into effect from 1 March 2019, that VAT remains due on a deposit, even if the customer ultimately does not use the goods or services for which they paid. Previously, if non-refundable deposit money was taken for a VATable supply and the purchaser or customer did not follow through with the contract, then the seller would not have to account for the VAT, or if a tax point had already been created, could reclaim it from HMRC.
Rebecca Cobbs, Associate Solicitor in Mogers Drewett’s Commercial Property team explains how this could affect commercial property;
“In a commercial property context this could affect sales of property where the seller has exercised an option to tax. So for example, on a purchase price of £100k a deposit of 10% (£10k) would usually be made at exchange of contracts. Historically, VAT was not usually applied to this £10k deposit even when the sale attracted VAT. If the buyer did not follow through with the purchase and the contract was rescinded, and the deposit therefore retained by the seller, this was deemed by HMRC to be compensation for the loss suffered by such rescission and so did not attract VAT. If the sale was completed then the VAT on the full purchase price was paid over on completion.”
Since 1 March 2019 however HMRC has in the wake of 2 judgments by Court of Justice of the European Union (CJEU) revised their guidance. It now reads:
When a full or part payment is made on account for a taxable supply, a chargeable event occurs and VAT becomes due on the amount paid.
If the supply does not take place, the VAT must not be reduced, unless the payment is refunded. This is because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.
Rebecca continues, “This suggests that buyers should be budgeting an extra 20% on their deposit monies and that this should be collected by sellers’ solicitors at exchange of contracts. One cannot rely on the Standard Commercial Property Conditions (SCPC) or many standard commercial property sale/purchase contracts as these documents do not envisage that VAT will be recoverable from the buyer in breach when the contract is rescinded.
It may be that HMRC will offer guidance specific to property contracts or that the SCPC will be amended, but in the meantime professionals should consider taking the following steps:
- Agents should be aware of this update to VAT treatment and prepare buyers for the impact on the deposit they will need to provide in the event a site they are purchasing is liable for VAT.
- Solicitors acting for sellers should ensure that they collect VAT on any deposit paid under a contract or ensure that the contract is amended in such a way that an obligation (which needs to survive rescission) is placed on the buyer to pay the VAT in the event that the purchase is not completed and the deposit it forfeited.”
Should you have any questions or need some advice contact Rebecca on 0800 533 5349 or email email@example.com.