The VAT treatment of payments for unfulfilled supplies has been a topical area in VAT for many years. In the latest policy paper from HMRC dated 6 September 2019, HMRC has admitted to making an error when updating its policy affecting the Tour Operators Margin Scheme (TOMS).


Prior to 1 March 2019, HMRC accepted that certain retained deposits for unfulfilled supplies were deemed to be compensation payments and outside the scope of VAT. This treatment was widely seen within the travel and hotel sectors.

Following the EU Court ruling involving Air-France-KLM, HMRC changed its policy advising that from 1 March 2019, output VAT would be due on all retained payments for unused services and uncollected goods. The policy change would be wide-reaching and HMRC changed many of its VAT Notices accordingly, including the TOMS VAT Notice 709/5 – where HMRC advised that cancellation fees and forfeited deposits should be included within the selling price under TOMS, which subsequently increased the VAT liability.

HMRC’s recent policy paper (Revenue and Customs Brief 9 2019), advises that HMRC made an error when changing the policy for TOMS supplies. The paper explains that the tax point rules under TOMS are different to other types of supplies, and certain deposits should still be excluded from the TOMS calculation.

Under TOMS, there are two methods of determining the tax point of supplies – Method 1 and Method 2. We have replicated these from the policy paper below:

•    “method 1 and account for VAT when the traveller departs or the accommodation is occupied”
•    “method 2 and account for VAT when taking payment if it exceeds 20% of the sale price – if they receive a deposit of 20% or less then the treatment in method 1 applies”


If you use TOMS Method 1, no tax point is created until the traveller departs or the accommodation is occupied, therefore you must not include deposits within the TOMS calculation for supplies which customers fail to take up. In addition, if you use Method 2, deposits representing 20% or less of the price of the supply should be excluded from the TOMS calculation.

If you have accounted for VAT on such deposits, then you should be entitled to a refund from HMRC.

If you think you could be affected by this policy change, or if you have any wider VAT questions, please contact:
0141 886 6644

The information in this blog should not be regarded as financial advice. This is based on our understanding in September 2019. Laws and tax rules may change in the future.