HM Revenue & Customs ("HMRC") have recently updated their guidance and practice so that VAT can now be reclaimed on deposits paid for "no show" reservations. Hoteliers should therefore be trawling through their business records over the last four years to find such deposits in order to reclaim the VAT. The clock is definitely ticking!

What was the position prior to the change in practice?

Most deposits are advance payments on which VAT must be accounted for in the return period in which they are received. Only when a deposit was refunded to a guest could VAT accounted for be reclaimed. In the recent decision of Société Thermale d'Eugénie-les-Bains v Ministère de l'Economie, des Finances et de l'Industrie (ECJ Case C-277/05), the ECJ ruled that if a hotel reservation is cancelled the deposit that has been received by the hotel is outside the scope of VAT as it is deemed to be compensation for the damage suffered by the hotel as a result of the cancellation by the potential guest. There is no link between the payment and a supply of services.

As a result of this ECJ decision, HMRC have recently amended their guidance.

What changes have HMRC made?

HMRC have amended their guidance so as to accept that any VAT accounted for in respect of a deposit that is retained in the event that the guest makes a reservation but does not take up the reservation is treated as compensation for the person breaching the contract and therefore is outside the scope of VAT.  This also applies when a guest makes a reservation for a period of time but then stays for less time than they booked.

Many hoteliers will have accounted for VAT on this deposit when received. Therefore if the guest fails to turn up or cancels the booking, this VAT can then be recovered. It is likely that there will be a timing difference between when the VAT is paid and when it is recovered due to guests making reservations far in advance and paying the deposit at this time.

However HMRC have made it clear that where VAT is paid in respect of a deposit to secure either a specific room i.e. an identified room is being kept vacant for a guest, or a specific room type, the hotel will not be able to recover this VAT as this is considered a payment for a supply of services.

What action do you need to take?

You need to act quickly! There is a four year time limit on back dating claims. Therefore it will be a worthwhile exercise to look through your records for the past four years to determine whether VAT was accounted for to HMRC on any deposits which were later forfeited and if so, this VAT should be able to be reclaimed.

Going forward, VAT will still need to be accounted for to HMRC when the deposit is received from the guest but in the event that the deposit is retained in the circumstances detailed above, hoteliers should be able to reclaim this VAT accounted for from HMRC. In practice this should not be problematic for hoteliers but is another matter for the hotelier to monitor.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 20/05/2011.