VAT on No-Shows in the Hotel Sector: What You Need to Know

Deposits and their VAT regime

Initially, the Court of Justice of the European Community (ECJ) ruled on the non-taxable nature of the deposit for VAT, through the “Société thermale d'Eugénie les-Bains” judgment of 18 July 2007 (aff. C-277/05). In this decision, the CJEC considered that deposits constitute lump-sum compensation paid to repair damage in the event of a customer's default, in particular in the event of cancellation. These deposits, which are in principle reciprocal (the customer is also compensated if the hotelier does not provide his service), are therefore not subject to VAT.

Deposits are distinguished from deposits, which represent an advance on the service to be provided and can be retained in full by the hotelier even if the customer does not show up. In this case, and especially if these amounts cover the entire service, the situation becomes more complex with regard to VAT.

Attempts to broaden this case law

Some operators tried to circumvent this decision by extending the scope of the Eugénie les Bains judgment to mechanisms where there was no reciprocity. These practices consisted in not applying VAT on amounts sometimes equal to the entire service, even in the absence of compensation for the customer if the hotel could not provide the service.

These attempts led to “economic anomalies”: in the absence of VAT on these amounts, hotels could benefit from a larger margin in case of no-show (No-Show) only if the customer actually consumed the service. This difference in treatment has attracted the attention of European tax authorities, which have carried out numerous tax adjustments to rectify these practices.

The CJEU judgments and the current framework

The CJEU intervened decisively in this debate. In a judgment of 23 December 2015 (case. C-250/14 and C-289/14 (“Air France-KLM”), the Court held that amounts retained by providers (such as airlines) for services not consumed should be subject to VAT. The underlying principle is that the simple fact of having provided the customer with a right (that of benefiting from a service) justifies taxation. This reasoning is based on the economic value retained by the service provider: the service was made possible, even if it was not consumed.

This position was confirmed and extended to other sectors such as movie tickets (CE, April 15, 2016, No. 373591, case MK2). The Council of State considered that the customer acquires a right to benefit from the service, regardless of its actual consumption.

Doctrinal positions and administrative clarifications

Until 2022, the tax administration had not updated its doctrine to take into account these jurisprudential developments. This allowed some operators not to subject cancellation fees to VAT, although they did not always meet the deposit conditions.

The Official Bulletin of Public Finances (BoFIP), updated on 11 May 2022, has now clarified this situation. The administration clarifies that the amounts retained for non-refundable bookings are subject to VAT, even if the customer does not show up or cancels the reservation. This explicitly includes hotel room reservations and amounts retained by passenger transport companies.

The administration also states that VAT applies even if the customer only bears a fraction of the price, such as the price of the first night's stay in the context of a multiple reservation. In addition, even if the customer formally cancels before the reservation period or does not show up, VAT is due on the amounts retained, as these amounts are considered to be the consideration for the possibility offered to use the reserved capacities.

Case law developments

In June 2022, the Paris Administrative Court of Appeal (CAA) applied this same reasoning to the hotel sector. It ruled that a hotel that keeps the full price of a stay, even in the event of a no-show, must subject this sum to VAT (judgment no. 20PA02348). This principle was confirmed in January 2023, in a similar case where only the price of the first night's stay was retained (judgment no. 21PA05850). This last judgment gave rise to an appeal before the Council of State, which confirmed the position of the Court of Appeal on the basis of the general conditions of sale. The Council of State analyzes the contractual and factual elements to determine whether it is a mechanism similar to a deposit.

Exceptions: The deposit

The administration recalls that deposits, under article 1590 of the Civil Code, are not subject to VAT. These deposits, by nature, are reciprocal, i.e. the hotelier will have to return this sum if the service is not provided. On the other hand, if the hotelier keeps the full price, even in the absence of service, this sum will be subject to VAT.

Conclusion

The treatment of VAT on amounts retained in the event of a no-show depends heavily on the nature of the sum (deposit or deposit) and on the reciprocity of contractual obligations. Hoteliers and other service providers must therefore take care to properly qualify the amounts received in order to avoid tax adjustments. Recourse to deposits can limit the risk of taxation, provided that the entire amount of the benefit is not retained.

To conclude, it is essential that operators respect the strict VAT rules on no-shows to avoid possible sanctions. Many operators still treat this issue lightly and face recovery risks.

‍