Finance Act 2021 has amended Irish VAT legislation in relation to the VAT treatment of cancellation fees, including forfeited deposits, retained by business in the event of a customer cancellation.
Traditionally Irish Revenue had taken the view that if the vendor receives a deposit that the deposit is treated as an advance payment and that VAT is due when the deposit is received. Prior to the amendment in Finance Act 2021, our domestic VAT legislation provided that In the event that the actual supply did not proceed then the supplier could claim a repayment of the VAT on the deposit, even though they retained the deposit money and did not refund the customer. Finance Act 2021 has now deleted from our legislation the entitlement to claim a refund of VAT. The rationale behind this amendment is that it is intended “to give effect to judgments of the Court of Justice of the European Union to provide that cancellation fees are taxable as they constitute a payment for either a service or a right to access a service”.
So what exactly are these judgements of the Court of Justice? There was CJEU case in 2007 (Société thermale d’Eugénie-Les-Bains- C-277/05) relating to the VAT treatment of deposits received by a French hotel. The Court held that where a business received a non-refundable deposit and the service was subsequently cancelled by the customer then the VAT could be reclaimed by the business where it had previously been accounted for on receipt of the deposit. The rationale for the CJEU ruling was that as a supply of service did not actually take place (no show), the deposit was outside the scope of VAT. One of the underlying criteria for a VAT charge to arise is that there must be a supply of goods and/or service for consideration. This case led to an amendment to Irish VAT legislation allowing a refund of VAT in such circumstances.
In a more recent case (Air France–KLM and Hop!-Brit Air SAS C-250/14 and C-289/14), the CJEU considered the VAT treatment of no-shows in the context of passengers who had paid for flights but did not turn up for their flights. In this case the customer had paid for the ticket and therefore had the right to travel but did not show up. As the issue of the ticket was a right to travel the Court held that there had been a supply for consideration, albeit the passenger decided not to travel. As such the consideration was correctly subject to VAT.
Another 2020 (case C43/49- Vodaphone Portugal) related to the VAT treatment of termination fees applied on early cancellation of mobile phone contracts. The CJEU held that “supply is made by the supplier of services when it places the customer in a position to benefit from the supply, so that the existence of the abovementioned direct link is not affected by the fact that the customer does not avail himself or herself of that right”.
The amendment came into effect from 1 January 2022. It is interesting to note that Revenue seem to be applying the judgements in Air France and Vodaphone, whilst ignoring the judgment in Société thermale d'Eugénie-les-Bains. The facts in the more recent cases were very different from that case. Interestingly Revenue appear to be following HMRC’s lead, which amended its equivalent domestic legislation in 2019, prior to “getting Brexit done”. Therefore those businesses that charge non-refundable deposits or other forms of cancellation charges should carefully review how they are treating such charges for VAT purposes. It is important that each case is considered on its own particular facts and circumstances.
If you would like to know more about VAT treatment of cancellation deposits, contact our Tax Team:
- Sinead McMahon, Tax Director, (01) 6440100
- Ronan McGivern, Tax Partner, (01) 6440100
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