Until 1 March 2019, HMRC allowed businesses to treat retained deposits for cancelled supplies as compensation and therefore outside the scope of VAT, as long as the customer hadn’t used the service, or collected the goods.
However in 2018 HMRC reviewed its policy following judgements by the Court of Justice of the European Union (CJEU), and issued Revenue and Customs Brief 13 (2018) confirming that the policy was to change with effect from 1 March 2019.
This means that where a deposit is paid towards the balance of supply, and the supply is subsequently cancelled, the deposit paid cannot later be reclassified as compensation, and remains payment for a supply, albeit that supply is now unfulfilled. This means your client cannot make any VAT adjustments on deposits for unfulfilled supplies unless the deposit itself is refunded to the customer.
Regarding your client’s worry about their ability to file returns and pay on time, The Chancellor recently announced that HMRC has set up a dedicated helpline serviced by an extra 2,000 staff, for businesses who may be struggling to submit returns on time because of isolation issues, or struggling to pay because of a downturn in business. You should contact HMRC as soon as you become aware of a potential issue on their dedicated helpline which is 0800 0159 559.
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