We’re all used to paying deposits, whether you’re buying a car, reserving a hotel room or leasing a house, chances are you’ll be paying a decent size chunk of the price up front and often before the transaction is completed. Deposits are usually one of two things:
- it’s either part of the price for the goods or services paid in advance to reserve your purchase; or
- it’s an additional payment in addition to the price to provide the supplier – typically a landlord – with payment to cover the cost of any damage to the goods.
Deposits and tax points
The important thing for VAT, of course, is whether and when suppliers have to pay VAT on deposits. If a deposit is “consideration for a taxable supply”, then receipt of the payment establishes a tax point. The supplier has pay VAT on the deposit on the VAT return for that period. So it’s important to understand if a deposit is advance payment or something else. There have been a lot of VAT cases about the subject, for example when a hotel deposit creates a tax point, so it’s a widely debated issue.
Because deposits are paid for different reasons, the VAT treatment of deposits varies according to the situation. In some cases, paying a deposit creates a “tax point”, which means that the vendor has to pay VAT on that income straightaway. In other cases, the deposit isn’t contractually linked to the underlying supply of goods or services, so the payment doesn’t create a tax point.
However one of the most common use of deposits is in property deals. Normally, payments can be made in one of 2 ways:
- to an agent of the vendor who is acting on behalf of the vendor; or
- to a third party stakeholder who holds the deposit independently of either party until completion.
For some reason, this issue gets a lot of people confused, so I thought it was worth explaining the difference.
It goes back to basic VAT principles; i.e. when does the supplier receive payment? If the vendor’s agent, acting on behalf of the vendor, receives the payment, then the agent receives the payment for the vendor and the receipt of the payment creates a tax point.
VAT Notice 700, para 14.2.3 says: “…if a third party acts as a stakeholder (as opposed to an agent of the vendor) in a supply of property and receives a deposit, then no tax point is created until the money is released to the vendor.
But what is a “stakeholder’s” role: The law describes a stakeholder as “originally a person who temporarily holds money or other property while its owner is being determined”. Apparently the word is now used in other situations, but when it comes to VAT and property, the original meaning applies.
And actually, this is a very appropriate use of the word. A stakeholder who “temporarily holds money …. while its owner is being determined” quite succinctly reflects the contractual position in respect of property sales between the date on which contracts are exchanged and the sale is completed. The exchange of contract creates a legal obligation to buy or sell a property, so while the vendor retains ownership of the property until completion, the purchaser also has an interest in the property from the date on which contracts are exchanged. The ownership of the money paid by the purchaser is also to be determined during this period.
So that’s why there’s no tax point when a deposit is paid to a stakeholder.