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In spring 2019 HMRC changed its guidance on the VAT treatment of deposits when guests cancel a booking or do not arrive (no-shows).
This means that if you withhold a deposit as compensation for a guest cancelling, you must return the VAT component of the deposit as no service has been provided.
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Disclaimer: Whilst every effort has been made to ensure the accuracy of the information contained in the Pink Book of Legislation, we regret that we cannot be responsible for any errors. To avoid any problems with cancellation or curtailment (when a guest cuts their stay short), you are strongly recommended to have a cancellation policy.
If you take bookings via the internet, it is a good idea to have a ‘tick-box’ where the guest has to confirm that they have read and accepted the cancellation conditions.
If a guest cancels a booking or checks out early, they are in breach of the booking contract they have with you.