Refundable Deposits

In a recent decision by the FTT, Airline Placement Ltd has lost its appeal against HMRC over the VAT treatment of payments made by trainee pilots.

Background & Issues:

• As part of its business model, trainee pilots were required to pay a “security bond” before commencing training. This bond was intended to secure the trainee’s place and ensure commitment to the programme.

• The company treated these payments as refundable deposits, arguing that they were not payments for services and therefore not subject to VAT.

• The central question was whether the security bond paid by trainee pilots constituted consideration for the supply of training services, which would make it liable for VAT.

The FTT considered:

• The nature of the “Security Bond”, was it a genuine refundable deposit, or a payment for services, specifically for pilot training.

• The economic reality of the transaction, applying the principle of substance over form, assessing whether the bond was integral to the training contact and whether it was retained in a way that suggested it was part of the consideration for a taxable supply.

• How Airline Placement Ltd structured its business. Whether the company acted as a training provider or an intermediary and how the funds were handled and whether they were used to fund training.

FTT’s Decision

• The tribunal sided with HMRC, concluding that the bond formed part of the consideration for the training services. As a result, the company was liable to account for VAT on those payments.

Key takeaways:

• The ruling could have implications for other training providers and educational institutions that use similar financial arrangements.

• On a wider basis, the ability for ‘refundable deposits’ to sit outside the scope of VAT is very limited, and anyone looking to apply this treatment should review matters closely to ensure compliance.