Deposits paid by customers who subsequently fail to show up will no longer be liable to VAT after a landmark ruling at the European Court of Justice (ECJ).
Adjudicating on the case of a French health resort group that was first triggered in 1992, the ECJ ruled that, in the event of no-shows, such deposits effectively become cancellation payments compensating the business for the loss it incurs.
"In short, the European Court has ruled that VAT is not payable on deposits retained in the event of customer cancellation," said KPMG VAT partner Niall Campbell. He added that the case would affect not just hotel booking deposits but any business, including restaurants, construction providers and so on, which routinely receive deposits from customers.
"The current Irish Revenue position is that VAT is payable by the hotel on this [ cancellation] charge," said Mr Campbell. "The impact of this European Court decision is that VAT will no longer be payable on the cancellation charge. From a total industry perspective, the total VAT refund due to Irish businesses could run into millions."
Hotels are liable to VAT at 13.5 per cent on room reservations and meals. Car hire is similarly rated. However, according to the Revenue website, cancellation charges are liable to a higher, 21 per cent tax rate.
Fergus Gannon, director of VAT services at Deloitte, said Irish hoteliers and others can reclaim the VAT they have paid on such payments in the last four years. They are advised to get their claim for repayment to the Revenue Commissioners as quickly as possible, because there is a "four year from date of claim" cut-off.
While it was not clear last night how much money would be at stake for the Irish services sector, the ECJ ruling is the latest in a string of judgments that have generally restricted Revenue in the area of VAT law.
The latest ECJ ruling was also notable in that the court overturned the formal opinion of the advocate general, who had advised that deposits retained in the event of no-shows should be treated as liable to VAT.
