HMRC recently made two announcements which should be taken into consideration by hotel businesses. The first is a policy change regarding the VAT treatment of retained payments, and the second is a new voluntary disclosure facility that provides companies with an opportunity to disclose and correct any tax inaccuracies relating to profits diverted out of the UK.
HMRC Policy change regarding the VAT treatment of retained payments
On 14 December 2018, HMRC announced a change to its policy on the VAT treatment of payments for unfulfilled supplies (i.e. a deposit for a hotel room that the customer fails to make use of). The current policy allows hotels to treat deposits, cancellation fees and no show charges relating to reservation guarantees as outside the scope of VAT. However, under the new policy that will take effect from 1 March 2019, HMRC will seek to recover the VAT on all cancellation fees, deposits and no show charges (unless the customer receives a full refund).
HMRC has advised that its new policy is based on the CJEU decision in Air France-KLM and Hop!-Brit Air SAS v Ministère des Finances et des Comptes publics (Case C-250/14) which held that VAT was chargeable on non-refundable air tickets that were not used by customers. However, it appears to ignore the decision of the CJEU in Société thermale d'Eugénie-les-Bains v Ministère de l'Économie, des Finances et de l'Industrie which held that deposits retained by a hotel should not attract VAT as the hotel was not making a supply of any identifiable service to the customer. If you are a hotel that currently treats retained deposits, cancellation fees and/or no show charges as being outside the scope of VAT, the change in HMRC's policy could have a significant financial impact on your business. There are legal challenges to HMRC's new policy that are available to taxpayers. However, in advance of 1 March 2019, businesses, particularly hotels that treat retained payments as outside the scope of VAT, should:
- Prepare to change their VAT accounting practices from 1 March 2019;
- Compare their current reservation arrangements and treatment of retained payments to the facts in Société thermal and consider writing to HMRC to confirm their view on those precise arrangements; and
- Consider how their current reservation arrangements could be amended to strengthen their position should they decide to submit a VAT reclaim or challenge the lawfulness of HMRC's policy after 1 March 2019.
Profit Diversion Compliance Facility ("PDCF")
On 10 January 2019, HMRC announced a new voluntary disclosure facility that gives companies, such as multinational hotel businesses, an opportunity to disclose and correct any tax inaccuracies relating to profits diverted out of the UK. Despite the Diverted Profits Tax being introduced in 2015, HMRC believe many multinational companies, including multinational hotel chains, are still avoiding paying the correct amount of tax in the UK by using transfer pricing policies to divert their UK profits. HMRC recognise that not all errors are deliberate and that mistakes or inaccuracies can occur due to policies being out of line with the OECD guidelines or as result of businesses changing and transfer pricing policies not being updated. The PDCF is intended to encourage companies, such as multinational hotels, to review their current cross border arrangements and provides them with the opportunity to bring their UK tax affairs up to date by making a disclosure and paying any tax liabilities and penalties where errors are identified.
The main benefits to a business of using the PDCF include:
- HMRC will not start an investigation into any company registered for the PDCF before its disclosure is submitted;
- Any disclosure will be treated as unprompted (unless HMRC already have an open enquiry into the company), therefore any penalties will be lower;
- If a deliberate inaccuracy is disclosed, HMRC will not publish details of any corporate entities involved;
- It is an accelerated process – HMRC aim to respond to submitted reports within three months; and
- Although the PDCF does not provide automatic immunity from criminal investigation, HMRC have made it clear that they are unlikely to start a criminal investigation if a full and accurate disclosure is submitted.
If you are a multinational hotel business, the PDCF represents a good opportunity to review your current transfer pricing practices and, if necessary make a disclosure to regularise your affairs. The facility is now open and businesses have until 31 December 2019 to register.