Britain’s exit from the EU threatens major changes to the tax regime for UK travel companies. Ian Taylor reports from a Hill Dickinson seminar
The UK government is divided on the tax implications of Brexit, but the travel industry is “going to see a lot more tax”, according to a leading tax lawyer.
Hill Dickinson partner Iain Donaldson warned: “The moment we leave Europe, we’re going to end up with issues around what [tax] you pay and where.
“A big battleground is going to be around where you’re trading. Do you have a permanent establishment in the UK [or] do some [post-Brexit tax] changes mean you end up with a permanent establishment in another jurisdiction?”
Another “battleground” could be around transfer pricing on goods or services ‘sold’ between a parent group’s subsidiaries. Donaldson said: “Transfer pricing should have solved most of the [tax] issues of moving money between companies. But the diverted profits tax [introduced in 2015 to counter tax-avoidance arrangements by multinationals] is an admission it isn’t working. It’s also a way of grabbing tax before it goes abroad.”
Addressing a Hill Dickinson seminar in London at the end of last year, Donaldson highlighted a divergence in views between the Treasury and UK tax office, HM Revenue & Customs.
He said: “The Treasury view is ‘We’re not expecting much to change. If we want to retain trading arrangements with the EU we have to keep something similar to VAT.’ HMRC’s view is different. They would like it all to change.”
Donaldson said: “We’re going to see a lot more tax. HMRC sees this as an opportunity to nail things down.”
Tour operators should expect changes to the Tour Operators’ Margin Scheme (Toms), which limits VAT payments by UK companies under an exemption to EU law. Industry accountant Chris Photi of White Hart Associates said: “A few of my clients got excited about Brexit, saying ‘If we’re outside the EU, our EU suppliers will become international and be zero-rated [for Toms].”
But Toms expert Martin Pooley suggested: “Looking back, we’ll regard Toms as a haven. It won’t be so nice in the future. I have a list of things that could really be unpleasant: VAT on transport, VAT on online travel agents, VAT invoices from suppliers in destinations. Toms right now is a VAT invoice-free area – not in the future perhaps.”
Pooley warned of “all sorts of issues”, saying: “You don’t realise how easy Toms has been. Brexit gives the chance to make it much harder and [chancellor Phillip] Hammond must want to [make it harder]. He needs the money.”
Donaldson agreed, saying: “If you’re a chancellor with a black hole of more than £100 billion, the temptation to say ‘We’ll have that rather than it be taxed in Spain or France’ will be huge.”
But Donaldson also argued the UK should benefit more broadly from having a tax regime outside the EU, with UK corporation tax [on company profits] due to fall to 17%.
He said: “We’re going to be a tax haven and we’re going to be perceived as one. We’ll have corporation tax rates half those of some EU members.”
Agents risk being targeted by HMRC over card fees
Travel agents that overcharge on credit and debit card fees risk being targeted by HM Revenue & Customs for unpaid VAT on the charges, tax experts have warned.
Restrictions on credit and debit card charges came into force in December 2015. But tax law specialist and Hill Dickinson partner Iain Donaldson said: “There are so many companies charging more than they are allowed to. The consumer rights regulations for payment charges just haven’t been applied.”
Donaldson told a Hill Dickinson travel law seminar in London: “HMRC will pick the easiest case. They go for where they can get the largest amount of yield fastest with the least effort [and] if they find out you aren’t compliant [with the rules on card charges], you’re on the back foot.”
Leading industry accountant Chris Photi of White Hart Associates told the seminar at the end of last year: “This is a big issue. There is a cost to using cards. You have to pay your interchange fees, Visa and Mastercard fees, merchant acquirer fees. You may even pay a third party to process [transactions]. You can charge the customer for those things, but the travel industry tends to charge a flat percentage.
“If you look at the latest Department for Business guidance there is very little you can charge for legally. If you look at charging in the travel industry, the amounts are a fair bit higher.
“The guidance on this has changed more often than the Atol regulations. It has gone from ‘You can charge for all these things’ to ‘You can charge for practically nothing’.”
Photi added: “We used to believe [agency] debit and credit card charges were exempt from VAT, but all of us now think VAT is payable on credit and debit card charges. “The legislation is designed so that the consumer shouldn’t be overcharged, but HMRC is quite willing to say ‘We want the VAT’.”