What’s in a Name? Prepayments, Deposits, Vouchers and Options

The VAT treatment of prepayments or deposits for hotel rooms or airline tickets where the customer does not use the service has generated considerable debate and litigation. One view expressed is that the supplier is making the service (room or flight) available so VAT is payable whether or not the customer comes. A second view is that the supply only happens when the service is provided so no VAT is payable if the customer does not arrive and the supplier enjoys a tax-free windfall of the VAT-inclusive price. Both views fail to take into account the commercial reality of what the customer is actually paying for – an option to use the service if the customer chooses to show up and take the room or flight, or walk away and not use the service without any penalty.