By Andrew Norman is a VAT director at accountancy firm, Menzies LLP (www.menzies.co.uk)
Pub and restaurant businesses have faced a perfect storm of challenges during the pandemic.At a time when factors such as staff shortages, rising costs and rising wage bills are impacting profitability across the sector, customer ‘no-shows’ can have a significant impact on the financial performance of a pub or restaurant business.
As a result, many have introduced booking fees and cancellation charges for customers, with the aim of discouraging such behaviour and protecting their business model.This has led to many introducing booking fees and/or cancellation charges, in order to cover their costs in case of customers not turning up.
However, confusion around the VAT treatment of such transactions could mean many businesses are not accounting for VAT correctly.This could lead to an increase in errors on VAT returns and the need for corrections and possible claims for VAT overpayments in the run up to Christmas. So, what do businesses in the hospitality and leisure (H&L) sector need to know?
It’s important to be aware that from a VAT perspective, booking fees and cancellation charges are treated very differently. Confusion in this area could see companies not accounting for VAT correctly, impacts on cashflow or even HMRC investigations in the months ahead, leading to possible penalties, interest and additional costs.
To properly understand the differences in the VAT treatment of these two types of transactions, business owners need to understand howVAT legislation has evolved.Value-added tax is usually charged whenever there is a transaction of goods or services. However, it does not apply if the payment is deemed to be a compensation payment.A cancellation charge would fall into this category, but a booking fee would not.This is because a deposit, if it is non-returnable, is viewed as an advance payment for supply.
When introducing booking fees or cancellation charges, it’s vital that businesses make it clear to customers from the outset what kind of transaction they are making.They should also ensure they have enough evidence
to support a claim for VAT, which should be based on their contractual terms. For example, if a business makes a cancellation charge and it is set out in their agreement with customers, it is classed as being outside the scope of VAT.
Another pitfall for business owners to avoid is simply renaming a deposit as a cancellation fee at a later date, in order to optimise their VAT position. For example, if the business has taken a booking deposit and the customer fails to show up, there may be a temptation to treat this as a cancellation charge instead. However, in its Hotels and Holiday Accommodation VAT Notice, HMRC emphasises that this is not permitted and could result an investigation of past VAT claims.
HMRC’s guidance also implies that where credit card details are taken, and then used to charge a fee if the customer doesn’t show up, this can’t be automatically classed as compensation and VAT would therefore be due. On the other hand, if there is a contract in place, which clearly states that a cancellation fee would be payable in these circumstances, then VAT would not be due.
It’s worth bearing in mind that over the last 18 months, temporary changes to VAT rates and the introduction of support measures have made the process of accounting for VAT significantly more complex for many pub and restaurant businesses. For example, for the period from 15th July 2020 to 30th September 2021,VAT on the sale of food and non-alcoholic drinks consumed on a business’ premises was reduced from 20 per cent to 5 per cent. Since then, the VAT has increased to 12.5 per cent but will rise to 20 per cent from 31st March 2022. Businesses also need to take care that they apply the correct VAT rate, depending on the time a booking deposit is made.
For pub and restaurant businesses that have charged compensation or no-show fees and accounted for VAT, but actually met the conditions of a compensation payment, it’s not too late. Depending on the amounts due, these can either be corrected on the next VAT return or a disclosure should be made to HMRC as soon as possible.
While many pub and restaurant businesses are beginning to get back on their feet financially, errors in how they account for VAT could have a significant impact on their bottom line. By making it clear to customers whether they’re introducing cancellation fees or booking charges, pub and restaurant businesses can optimise their VAT position during the festive season and reduce the likelihood of unwanted HMRC investigations.