New HMRC policy - Cancellation Charges/No Shows now subject to VAT

[sw1085]

Hi All

Hope someone can help with this query.

If we have a contract with a customer that says if they cancel a booking of an event and that we will therefore charge an amount as "liquidated damages". Do you expect this gets around HMRCs new policy to charge VAT on cancellation and no show charges?

https://www.taxadvisermagazine.com/article/changes-vat-treatment-retained-payments-and-deposits-1-march-2019

We understand that "Liquidated damanges" is a type of compensation for loss payment and therefore would be outside the scope of VAT.

Aside from this - I dont agree with HMRCs policy as there is no service being provided but that will likely take years to go through the legal system.

I just wonder if liquidated damages cannot be used instead of cancellation charges. Subject to clauses in the terms of conditions of course.

Thanks for your advice.

[robbob]

Unless you can see some positive indication from a vat expert that you may be on to something i guess you have less than bob hope chance here (no hope).
Just making up a fancy name for something is unlikely to change the facts - if it falls within the description of the hmrc bulletin as being subject to vat i guess that's it unless - as you say the whole basic principle is overturned at a later date.

Aside from this - I don't agree with HMRCs policy as there is no service being provided but that will likely take years to go through the legal system.

It's a tricky one but you have made a services available that someone hasn't utilised, all your incurred expenses have vat reclaimed so in some respects its all really normal trade income -practicably speaking not being able to pay vat on a % of retained business income that is intrinsically the same as vatable income always causes situations where the split can be tweeked to a degree that is probably not right . With regard to the amount paid by the customer - they received the services of the booking advise / administration and paid a "fee" for the certainty that they will have the option to have that services available if thye choose to go ahead - so its not exactly exactly like you have provided nothing with regard to the payment made.

[sw1085]

Hi Rob

Thats the issue with experts....one accountant said you can keep the money as liquidated damages and not pay the VAT on it as its outside the scope of VAT and another says you should pay the VAT on your cancelled income which in practice means we don't reclaim the VAT previously paid by crediting back the amount of damages at the previously paid rate. Two conflicting views which is about as helpful as a chocolate teapot. What we do reclaim the VAT on is the amount that we refund back to the customer but this is just amount the amounts we retain for our own account to cover losses which is formula driven depending on when you cancel.

So in your opinion - you dont think that if the contracts/terms and conditions clearly stated that there were no cancellation fees but an amount would be retained at cancellation as liquidated damages that this would stick?

What would be the consequences of this? I mean we'd have a tax lawyer approve it but then if hmrc disagreed, the solution would be tribunal?

Thanks for your time. I appreciate it. Complex scenario this, I think.

[robbob]

So in your opinion - you dont think that if the contracts/terms and conditions clearly stated that there were no cancellation fees but an amount would be retained at cancellation as liquidated damages that this would stick?

Question do your customers think they are paying a deposit / payment on account towards the goods or services when they are paying you?
Question - do you fully refund the deposit - then send them a separate invoice for liquidated damages which they then either pay or dispute as appropriate?

My opinion is that you would need specific advise from vat expert who is insured as appropriate or specific written confirmation from the vat office that what you plan is ok - i am not expert enough in this area to offer any concrete advise. my opinion is based on the text below which seems pretty simple (although its not the answer you want). Note if the facts are something other than outlined below well that's different - but trying to call something which falls within the facts below something else purely to avoid a vat liability is probably unlikely to succeed unless specifically agreed by the vat office.

https://www.gov.uk/government/publications/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits

4. New policy
From 1 March 2019 HMRC policy will be that VAT is due on all retained payments for unused services and uncollected goods. This will bring consistency of VAT treatment on all payments for goods and services where there is an unfulfilled supply. Where suppliers become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments. If suppliers find out the relevant goods or services will not be used or received before 1 March 2019, they may treat the prepayments under our current policy.

one accountant said you can keep the money as liquidated damages and not pay the VAT

Was this paid for written advise after release of latest hmrc guidance? if this is the case - send your proposed plan in writing to the vat office and see what they say - if they disagree start by going back to that accountant to see why the vat office say otherwise.

[robbob]

So in your opinion - you dont think that if the contracts/terms and conditions clearly stated that there were no cancellation fees but an amount would be retained at cancellation as liquidated damages that this would stick?

Question do your customers think they are paying a deposit / payment on account towards the goods or services when they are paying you?
Question - do you fully refund the deposit - then send them a separate invoice for liquidated damages which they then either pay or dispute as appropriate?

My opinion is that you would need specific advise from vat expert who is insured as appropriate or specific written confirmation from the vat office that what you plan is ok - i am not expert enough in this area to offer any concrete advise. my opinion is based on the text below which seems pretty simple (although its not the answer you want). Note if the facts are something other than outlined below well that's different - but trying to call something which falls within the facts below something else purely to avoid a vat liability is probably unlikely to succeed unless specifically agreed by the vat office.

https://www.gov.uk/government/publications/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits

4. New policy
From 1 March 2019 HMRC policy will be that VAT is due on all retained payments for unused services and uncollected goods. This will bring consistency of VAT treatment on all payments for goods and services where there is an unfulfilled supply. Where suppliers become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments. If suppliers find out the relevant goods or services will not be used or received before 1 March 2019, they may treat the prepayments under our current policy.

one accountant said you can keep the money as liquidated damages and not pay the VAT

Was this paid for written advise after release of latest hmrc guidance? if this is the case - send your proposed plan in writing to the vat office and see what they say - if they disagree start by going back to that accountant to see why the vat office say otherwise.