Reduction in VAT rate to 5%: What happens to VAT on deposits?

Background

Following on with our series of publications regarding the temporary VAT rate reduction announced by Chancellor Rishi Sunak, we now look at deposits and advanced payments made prior to the VAT rate change. This note highlights an opportunity to recover VAT on deposits received before the VAT rate reduction on 15 July.

Accounting for VAT on deposits

You are required to pay VAT to HMRC on the earlier of a deposit being received from or a VAT invoice being issued to your customer. If you received a deposit before 15 July, you will therefore have paid 20% VAT. Following the Chancellors announcement, 5% VAT will now be due on all cash receipts qualifying for the reduced rate until 12 January 2021. This applies to both deposits and balancing payments received by your business. If you receive a deposit now for a booking after 12 January 2021 you pay VAT at 5%.

Recovery of VAT

If you received a deposit before 15 July, for a booking between 15 July and 12 January 2021, you can reduce the VAT paid on the deposit.

For example, if a customer paid you a deposit for holiday accommodation on 1 March 2020 of £150, £25 VAT will have been declared to HMRC (20%). If the booking is between 15 July and 12 January 2021, you can choose to recalculate the VAT due on the deposit at the reduced rate. The VAT due to HMRC on the deposit will therefore be reduced to £7.14 and you can recover £17.86 when you submit your next VAT return. It is your decision whether to retain this repayment of VAT to improve your financial position or pass it on to your customers as a gesture of goodwill.

If you issued a VAT invoice when you received the deposit, you will need to issue a credit note showing the reduced rate of VAT.

Please get in touch if you require further information or assistance with the calculation of any VAT to recover from HMRC.

Please contact Jonathan Main on 01772 821 021 or equally email jonathan.main@mooreandsmalley.co.uk

For more information on this recent reduction in VAT to 5% please see our other blogs below:

If you need any further information in regards to VAT please check our recent VAT hub for further insights.