Autumn 2007 Newsletter Contents Borrowed clothes? You want it when? The daily grind Knock knock Computers@home Stick to the facts It's personal Expense claims Cash down Plant buying Hobson's choice A helping hand Education, education Up with the Joneses Bills bills bills Done to a crisp Tax association

Cash down If you take money in advance of selling something, that triggers the "tax point" for VAT - you have to pay the VAT element to HMRC. No matter, at least your customer has already paid you. But what happens if the sale then falls through? In many businesses, of course, you issue a credit note and return the money. If that's a genuine cancellation of the supply, you reverse the entry in the VAT account and you get the tax back from HMRC. No problem. In some businesses, such as the hotel trade, it's common for all or part of the advance payment to be forfeited by the customer on a cancellation. What then? HMRC's VAT guide tells you that a forfeited deposit isn't a payment for any supply - after all, the supply never took place - so you reverse the VAT entries and get the tax back anyway, even if you have the cash. It's unusual to be able to keep the whole of a receipt without giving any to the taxman, but that's the rule. The problem is that it's different if the customer actually paid for the hotel room and just chose not to sleep in it. Then VAT is due. Sometimes it's obvious that what was paid was a deposit - say £50 for a £120 room, which could be sold again on cancellation. Sometimes it's obvious that a supply was made - £120 paid in advance for a guaranteed reservation. Sometimes it might be in the grey area in between. A recent European Court case confirmed that this is the correct treatment of deposits. Some lawyers had argued that "making the reservation" was a taxable service in its own right, and the payment of the deposit was for that - but the judges disagreed. It's nice to know we have been doing it right all these years. If you take deposits which customers sometimes forfeit, and you aren't sure what the correct VAT treatment should be, we'll be happy to advise you.