Q: My business has been asked by our landlord to pay a security deposit against the safe return of the commercial property we have rented. We have been charged VAT is this correct?

A: A taxable supply is defined in law as a consideration received for a supply of goods and services in the United Kingdom. Although the majority of items will be treated as supplies there are a number of payments received which may not be a consideration because there is no direct link between the payment and the supply, or there is no supply of goods or services in return for the payment.

Deposits are generally taxable but there are a number of situations where they are not a consideration for a supply.

Forfeit deposits are a payment for damages, to compensate for example work done on a cancelled supply. A common example of this is a deposit for a hotel room that is not used. Although the payment would originally be for an advance payment for the supply of the room and attract VAT, if subsequently the booking is cancelled the payment becomes compensation/damages for breach of contract and would be outside the scope of VAT.

Deposits taken as a security, for example against the safe return of goods on hire are not a consideration for a supply. The terms of the contract would typically specify that the deposit is refundable subject to the safe return of the goods. If the customer damages the goods they have broken the terms of the contract and forfeit their deposit.

Compensation payments for damage and loss are outside the scope of VAT. This is because the payments are made either as a result of a Court Order or through an agreement between the two parties involved to compensate one party for suffering some inconvenience, loss or damage.

Donations, if given freely, are not a consideration for any supply. The donation has to be unconditional; the donor must not receive anything in return for the payment or attach any conditions to the donation.

Services charges in restaurants are part of the consideration for the underlying supply of the meals if the customer is required to pay them, and so would attract VAT. This will apply even if they are passed on in full as bonuses to staff. If customers have a genuine option as to whether to pay the service charges, HMRC accept that they are not a consideration even if the amount appears on the bill.

If a tip is genuinely freely given then they are outside the scope of VAT as they are not a consideration for VAT purposes. However, if the element of free choice is removed, the payment is part of the consideration for a supply.

Insurance companies’ policies normally cover the repair of goods. If goods are repaired under an insurance policy, insurers will make payments to policy holders for the costs of the repairs. These are not payments for any suppliers.

Most insurance policies have an excess amount which is not covered by the policy. Payments by policy holders to insurers for any excess amount for repairs under insurance policies are not considerations since there is no supply made by the insurer to the policy holder.

All in all this is a very involved area and if you are unsure of the liability of a transaction give the TaxWise Advice Line a call on 01455 852555.