Q: I have to frequently stay in hotels when I’m on business trips. The hotel takes a deposit at the time of booking with the balance of the cost paid over when the stay takes place. Sometimes my plans, or those of my customers change and I have to cancel the booking and the hotel keeps the deposit paid. Some hotels send a VAT invoice covering the amount of the deposit they retain after the cancellation and some say that they cannot issue a VAT invoice because VAT is not applicable to the amount they have retained. Which is correct for VAT purposes?

 

A: Normally a deposit retained by the hotel if the guest cancels their booking ceases to be a consideration for a supply unless any part of the supply relating to the deposit has taken place.  Provided the booking contract contains terms allowing for cancellation, the retained deposit is outside the scope of VAT and the hotel can adjust the output tax already paid over to HMRC.

However, hotels often re-sell rooms if a guest has not checked in by a certain time. If you were to make a ‘guaranteed booking’ where the hotel agreed not to release the room, and then either cancel after that time or simply fail to show up, any deposit retained and any cancellation fee charged would be a consideration for keeping that room available and subject to VAT.

 

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