If you pay a non-refundable deposit for a hotel room and you fail to turn up, you are nonetheless charged VAT.
But what has that to do with sales of commercial property? Read on.
Consider a sale of property on which VAT is chargeable (typically because the ‘option to tax’ has been exercised). Normally a deposit will be taken on exchange of contracts, which will be held by a stakeholder to be applied as part of the consideration on completion, at which point VAT will be accounted for by the vendor and reclaimed as appropriate by the purchaser.
But what if the purchaser defaults and the deposit is forfeited?
Historically, HMRC have accepted that as, in that case, no ‘supply’ is made, no VAT is payable. But it is now being suggested (the position is not yet completely clear) that they may now take the view that buying a £100m building is governed by the same principles as renting a £100 hotel room, such that VAT is chargeable on the non-refundable deposit.
Note that there is no suggestion that VAT is payable at the time at which the deposit is paid to the stakeholder: rather, it is payable by the vendor (and, if appropriate, recovered by the purchaser) only at the time of completion or forfeiture. But that timing mismatch between payment and the VAT point presents its own problems.
Extracting an extra 20% from a defaulting purchaser at the time of default may be difficult or impossible: so a vendor who has in the past required a 10% deposit may now be wise to seek one of 12%, at least in a case where he apprehends that forfeiture is more than a fanciful possibility. But whether, in such a case, a purchaser will be willing or able to be out of his money by an extra 20% for the period between exchange and completion is another matter.
The reason that the position in law is less than clear is two-fold.
First, (in contrast to a stakeholder deposit) there has never been any doubt in the case of a hotel room that VAT is payable at the time the deposit is paid: the question (on which HMRC changed their mind with effect from 1 March 2019) was whether the position changes retrospectively so as to allow VAT to be ‘unpayable’ if it transpires that the anticipated supply does not take place. Although we would have expected that HMRC would recognise the difference in law between the payment of a non-refundable deposit on booking a hotel room and the release of a stakeholder deposit on a purchaser’s default, it seems possible that our expectations may not be fulfilled.
Second, HMRC’s recent Brief 12/2020 (on which we commented here) muddies the waters further. It deals with contractual early termination payments (such as on telecommunications contracts) but amended guidance issued at the same time reflects HMRC’s view that ‘a lot of payments described as compensation are actually consideration for supplies.’ That might conceivably extend to forfeited deposits on commercial property sales.
In summary – whether a stakeholder deposit on an opted or otherwise taxable property is regarded as an ‘advance payment’ or as ‘compensation for withdrawal’ (or as neither of these), be aware of the possible VAT complications on forfeiture.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
