HMRC has published guidance explaining new rules that apply from 1 March 2019 which deal with advance payments for goods or services which aren’t received. What do you need to know?
Confusion. An advance payment for goods or services creates a tax point, so output tax is due at the time the payment is received if it relates to standard-rated or reduced-rated supplies. If your customer cancels the order, and the terms and conditions say they are not entitled to a refund, there has been past confusion about whether you can can reduce the output tax. This was on the basis that the payment then becomes outside the scope of VAT because no goods or services have been supplied.
Policy change.Business Brief 13 confirms that the following procedure will apply from 1 March 2019: “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.”
Tip. If your business has always reduced its output tax when a customer cancels an order and doesn’t get a refund, then you can continue to do this for cancellations up to 28 February 2019, even though HMRC now acknowledges this is incorrect. However, if your past policy has been to not reduce output tax, then you cannot go back retrospectively and claim a VAT windfall because you have effectively applied the law correctly.
Don’t issue tax invoices for non-refundable deposits as there is no output tax due on the payment and your customer cannot claim input tax. Output tax can’t be adjusted if you retain such deposits after 1 March 2019.