Key takeaways

  • A deposit that will form part of the price creates a VAT tax point when you receive it, so VAT is due on that amount in that VAT period.
  • HMRC says a refundable deposit can still create a tax point, rejecting the claim that refundability prevents one.
  • A security deposit, such as one held against the safe return of hired goods, is not payment for a supply and does not create a tax point.
  • For construction stage payments and retentions, the tax point is normally the invoice or payment, whichever comes first.
  • You should normally issue a VAT invoice within 30 days of the tax point, and a pro forma invoice must be marked as not a VAT invoice.
  • Since 1 March 2019, VAT is due on retained payments for unused services and uncollected goods, so keeping a forfeited deposit does not cancel the VAT.
  • Under the cash accounting scheme you account for VAT when paid, but supplies you invoice in advance of making them are excluded from the scheme.

If you are VAT registered, a deposit or stage payment usually triggers VAT the day you receive it, not when the job is finished. HMRC treats most deposits as advance payments that create a tax point, while security deposits do not. Stage payments in construction are taxed at each invoice or payment, whichever comes first.

When is VAT due on a deposit?

VAT is due on a deposit when you receive it, if the deposit will form part of the price of the supply. VAT Notice 700, updated 25 June 2026, says at paragraph 14.2.3 that most deposits are advance payments and create a tax point when received.

HMRC’s manual at VATTOS5120 says such a deposit creates a tax point under section 6(4) of the VAT Act 1994. The supply must be identifiable. Tribunals and the High Court, in cases such as Bethway and Moss and Moonraker’s Guest House, have backed this.

You account for VAT on the deposit in the return for the period in which you received it. The VAT is the VAT fraction of the amount: 1/6 at the 20% standard rate. Our VAT calculator works it out.

Does a refundable deposit create a tax point?

Yes, usually. HMRC’s VATTOS5125 says: “It is sometimes claimed that a refundable deposit or pre-payment cannot create a taxpoint. This is not so.” Tribunals have applied this to a cancellable hotel booking, golf club prepayments and time-share deposits.

If you later refund the deposit because the supply does not happen, you can adjust the VAT you accounted for.

What about security deposits?

A security deposit is not payment for a supply, so it does not create a tax point. HMRC’s VATSC06120 gives the example of a deposit taken against the safe return of hired goods, refundable when the goods come back.

If you keep all or part of a security deposit because the customer damaged the goods, HMRC treats the amount as outside the scope of VAT. If you deduct hire charges from the deposit before the end of the hire, that can create a payment tax point for the hire.

Which deposit is which?

Use this table to see whether VAT is due when the money arrives.

PaymentTax point on receipt?HMRC reference
Deposit towards the priceYesNotice 700, 14.2.3
Refundable deposit towards the priceYesVATTOS5125
Security deposit for hired goodsNoVATSC06120
Property deposit held by a stakeholderNot until releasedNotice 700, 14.2.3

How do stage payments work?

Each stage payment has its own tax point. For construction, Notice 700 paragraph 15.3 says the tax point is normally the invoice or the payment, whichever is first, with a final tax point on completion in some cases. Retention payments follow the same rule under paragraph 15.4: VAT is due when you invoice or receive the retention, not when the work is done.

For other continuous services billed in instalments, paragraph 14.3 sets a tax point each time you issue an invoice or receive payment, whichever is first. You can issue one invoice covering up to a year of regular payments. It must show each payment’s VAT-exclusive amount, due date, rate and VAT. For building work, see our guide to VAT on new builds and construction.

How should you invoice deposits and stage payments?

Issue a VAT invoice for each deposit or stage payment if your customer is VAT registered. Notice 700 paragraph 16.2.3 says you should normally issue it within 30 days of the tax point. A full VAT invoice must show:

  • a unique sequential number and the tax point date
  • your name, address and VAT number
  • the customer’s name and address
  • a description, quantity, rate and amount excluding VAT
  • the total VAT in sterling

To request money before a tax point, send a pro forma invoice instead. Paragraph 17.3 says it must be marked “this is not a VAT invoice” and cannot be used to reclaim VAT. Our guides to pro forma invoices and UK invoice requirements explain the formats.

Steps when you take a deposit

  1. Decide the type. Is it part of the price, or security?
  2. Record the date received. That is usually the tax point.
  3. Issue a VAT invoice within 30 days if the customer is VAT registered.
  4. Include the VAT in the return for that period.
  5. Invoice the balance on completion, showing the deposit already invoiced.
  6. Adjust the VAT only if you refund the deposit.

What if the customer cancels and you keep the deposit?

You still owe the VAT. HMRC’s Revenue and Customs Brief 13 (2018) says that from 1 March 2019 VAT is due on all retained payments for unused services and uncollected goods. This applies to full payments and part payments on account.

Does cash accounting change this?

Under the cash accounting scheme you account for VAT when you are paid, so a deposit is taxed on receipt anyway. VAT Notice 731 paragraph 2.7 excludes supplies where you issue a VAT invoice in advance of making the supply. Paragraph 5.1 says VAT does not apply to security deposits. You can join if expected taxable supplies are £1.35 million or less. See our VAT cash accounting scheme guide.

Frequently asked questions

Do I charge VAT on a deposit?

Yes, if you are VAT registered and the deposit forms part of the price. The tax point is the date you receive it.

Is VAT due on a refundable deposit?

Usually yes. HMRC says a refundable deposit can still create a tax point, and you adjust the VAT if you refund it.

Is a security deposit subject to VAT?

No. A deposit held against the safe return of hired goods is not payment for a supply, and a forfeited security deposit is outside the scope of VAT.

When is VAT due on stage payments?

At each stage, when you issue the invoice or receive the payment, whichever is first. Retentions follow the same rule.

Can I send a pro forma invoice for a deposit?

Yes. Mark it “this is not a VAT invoice”, then issue a proper VAT invoice once you receive payment.

Sources

Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.