Most Read Contributor in South Africa, September 2016
We recently wrote about the fact that Her Majesty Revenue &
Customs ("HMRC") updated their guidance and practice in
the United Kingdom regarding the VAT status of forfeited deposits,
following a judgment of the European Court of Justice
("ECJ") (ECJ Case C-277/05).
In that case the ECJ held that a deposit paid by a client to an
hotelier for the reservation of a room is not subject to VAT when
the client does not arrive and forfeits the deposit. The ECJ viewed
the forfeited deposits to be fixed compensation for damages
suffered by the hotelier because the contract was not fulfilled as
agreed, and that the hotelier did not make any identifiable supply
of any service to the client.
On 1 September 2011 the Full Federal Court of Australia came to
a similar conclusion as that of the ECJ in Case C-277/05 in
Quantas Airways Ltd v Commissioner of Taxation  FCAFC
In the Quantas case the Full Federal Court was required to
consider whether Quantas received consideration for a taxable
supply where a person booked and paid for a domestic air ticket but
either cancelled the booking or did not turn up for the flight, and
did not collect a refund.
Quantas appealed a decision of the Administrative Appeals
Tribunal ("AAT"), which held that Quantas made a taxable
supply by holding itself ready to carry passengers, even if it
never provided the air travel to the person who booked the
The Commissioner for Taxation argued that the passenger received
a reservation of an air ticket when he made the booking, and that
the reservation was the taxable supply for which Quantas received
the payment as consideration. However, the Full Federal Court
overturned the decision of the AAT and rejected the arguments of
the Commissioner. It found that the only relevant supply was the
supply of air travel, nothing more or less, and that the supply of
the air travel was both the substance and the reality of the
transaction, which cannot be split into other supplies. The Full
Federal Court therefore found that since the air travel was not
supplied, the amount retained by Quantas where the person cancelled
the booking or did not turn up for the flight, was not
consideration for any taxable supply as no supply was made.
These judgments bring into question the VAT status of all
prepayments received by a supplier and which are retained where the
goods or services are never supplied. One would need to identify
the relevant supply for which the payment was received, and if the
supply is never made but the payment is retained, the recipient may
not be liable for VAT. Where the recipient accounted for VAT upon
receipt of the payment, he may be entitled to a deduction if the
supply is never made.
The answer as to whether such retained payments are subject to
VAT will normally be in the underlying agreement between the
parties and the specific facts of each case must also be carefully
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
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