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Attrition fee (fee for resignation from service) and VAT

Adam KOŁODZIEJCZYK
tax advisor, Junior Tax Manager at RSM Poland

This time, I would like to write a few words about fees that can be frequently encountered in hotel services branch. I mean fees connected with cancelling or “no show” and their calculation on the ground of value added tax (hereinafter referred to as VAT). I would like to draw your attention particularly to the so-called attrition fee, which is a fee for rooms that are booked but eventually not used. The pattern of the described transaction generally looks as follows:

  • Company A is a conference organizer and because of this, it books a definite amount of hotel places for the participants (e.g. for 100 people);
  • The participants enroll on the conference and pay for their participation (with this money hotel rooms are payed);
  • If the organizer doesn’t use all previously booked rooms (because e.g. only 80 people enrolled), the hotel charges them a fee for remaining, not used 20 places (so it charges the organizer exactly the so-called attrition fee).

And now, the question arises:  how should such a fee be accounted for on the grounds of VAT? Is this a compensation , which should be beyond the scope of VAT, a hotel service at the rate of 8% , or maybe  a different service (e.g. place booking service) taxed at the standard rate? This problem does not concern solely entities  from hotel branch, but their customers as well. We will differently settle compensation (no VAT), hotel service (no right to deduct VAT) or a different service (in principle there is a right to deduct VAT if this service is connected with  business activity).

It may seem that the above mentioned fee isn’t connected with provision of any service, because in the end a room was not used. This may suggest that we should rather incline towards compensation and not settle the fee in terms of VAT at all. What is more, this approach is also confirmed by a part of tax authorities (Tax rulings by the Director of the Fiscal Chamber in  Warsaw of 6 November 2012, file ref. no. IPP2/443-993/12-2/KG and by the Director of the Fiscal Chamber Katowice of 20 February 2014, file ref. no. IBPP2/443-1076/13/IK).

Unfortunately, this issue is no longer so obvious if we consider rules and jurisdiction. In this specific case we deal with payment connected with reservation of a room by the hotel for a specific date. In other words, the hotel pledged not to make certain rooms (or certain number of rooms) available to any other person and consequently demands a compensation from a client (for profits that in fact  were lost). And this procedure corresponds with a definition of provision of services included in Art. 8 Paragraph . 1 of the VAT Act, according to which, provision of services is understood as every provision to a physical person, legal person or organizational unit that does not have legal personality (…), including a pledge to restrain from carrying out an activity or to tolerate an activity or a situation.

If a hotel restrains from not renting certain rooms (or certain number of rooms), does the service provision occur or not?  In my opinion, it does. If so, this service is charged. It has to be borne in mind that the fee  is charged not because a customer resigned from the service, but because during the period specified by the parties the room was booked (made available to this customer), and the hotel pledged not to rent it to any other customers. Therefore, if this customer suddenly doesn’t use the room, why shouldn’t the hotel get its due gratification? In such situation the hotel charges the fee according to the following rule: “You didn’t use your booking and this is your own business, but I provided you everything that you wanted, so pay me for it now.”

What is more, according to jurisdiction of EU Court of Justice (hereinafter referred to as EUCJ), a certain activity can be considered as carried out for a payment if there is a direct and clearly individualized profit on the side of provider of goods or service, and moreover when a fee for the received provision remains in a direct connection with an activity that was supposed to be taxed with VAT (judgement of EUCJ of 8 March 1988 in the Case of C-102/86 Apple and Pear Development Council against Commissioners of Customs and Excise). In the example situation the above mentioned conditions were met, so attrition fee should be incorporated in the definition of provision of services.

An additional premise for apprehending attrition fee as a fee for provision of a service is a fact that in this case there is a legal relation between the provider of service and its receiver, pursuant to which there is a mutual obligation, namely the obligation to book a room and not to make the room available to anyone else in the period specified by the parties. This provision has already been priced and remuneration, in fact, constitutes the amount due for the reservation service. Similar premises are also indicated by EUCJ, which provides the analysis of a definition of a service in its judgement of 3 March 1994 in the Case of C-16/93 R. J. Tolsma against Inspecteur der Omzetbelasting Leeuwarden,.

Personally, it is very difficult for me to accept treating the attrition fee as compensation, because what is this compensation for? There is also no accommodation service provided  because, after all, the room wasn’t used by the client. For me, such transactions should be treated as provision of services other than accommodation. They can be called services of booking accommodation places, but for sure they shouldn’t be considered accommodation services that are referred to in Art. 88 Paragraph 1 point 4 of the VAT Act. This means that the hotel, when calculating attrition fee, will be obliged to calculate VAT applying the standard VAT rate, whereas the receiver will have the right to deduct the tax included on the invoice if a subject transaction is  related with  taxable activities this receiver performs.

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