VAT on deposits

In the majority of cases the payment of a deposit is linked to an underlying transaction where a supply is being made and the deposit is intended to be offset against this supply. When we return a deposit this ceases to be the case. As a result of this VAT is not accounted for until that deposit is actually used as a consideration for a supply. Where we are part returning a deposit because a contract has been cancelled after part of the supply has been made, then we would have to account for the appropriate VAT on the portion of the deposit that was being retained as this, in the eyes of HMRC, becomes consideration for that supply. If a contract is cancelled before the supply is made and the deposit is retained in full, then this does not create a VAT liability and the sum paid as a deposit is deemed to be outwith the scope. This is because in order for there to be a VAT Liability there needs to be the supply of a good or service and in this case, there has been no supply made.

Where we are charging a deposit, for example on a container, if this charge is to ensure that we get the container back, and upon safe return the deposit is returned, then it could be considered to be a type of security deposit – which we cover below. However, if the deposit is more of a charge for the use of the container (i.e. a hire/loan) then what we are doing here is supplying a service and we would be required to account for VAT at the standard rate. This is the case regardless of whether the deposit is returnable or not.

Where we charge a deposit that we retain in the event of contractual obligations not being met – this could be through cancellation or breach of contract - (e.g. if we charge a customer a non-refundable deposit for a wedding that they then cancel) then we would not have to charge VAT on this deposit. That is because HMRC view this payment as a compensation payment for the breach of the contract. Under the VAT Act 1994, compensation is not subject to VAT as it is not deemed to be a supply of a service.

Separately from a forfeiture deposit like above, there are security deposits. A security deposit is a sum of money that is held either as an initial part-payment, for example if we were to be purchasing a car a security deposit would be used to prevent the vehicle being sold to another party while finance is arranged, or in the course of a rental agreement to either ensure the safe return of the items loaned or to account for damage that may be incurred during the course of the rental. Providing the payment is returnable then this is not considered a supply for VAT purposes and thus would be outwith the scope of VAT. However, if part of the security deposit is withheld, for example to pay for repairs, then this is deemed a supply and VAT should be accounted for accordingly.