Travel agents and operators are being urged to review their VAT liabilities after two new EU rules came into force on January 1 – despite some confusion over the full implications of the changes.

Grant Thornton VAT manager Damon Wright warned the industry not to “stick its head in the sand” about the regulations, as Her Majesty’s Revenue and Customs (HMRC) will be investigating travel companies later in the year and could impose fines for non-compliance.

He said: “Hopefully, HMRC will take a pragmatic view and be satisfied if they can see that businesses are at least trying to get it right and will not penalise them. If travel companies have not yet consulted a VAT specialist, they should do it now.”

Saffery Champness VAT partner David Bennett said there was a need for more clarification on the changes. “We will be speaking to HMRC about a number of topics in the next 12 months. Some of these issues have only just come to light, but we will be pushing for some resolution,” he said.

The main change is the removal of the ability to opt-in or opt-out of the Tour Operators’ Margin Scheme (TOMS), under which travel firms
pay VAT.

Some tour operators, travel management companies and agents selling business travel – who often opt-out of the scheme – will now be forced to pay tax under TOMS. Companies who previously opted out of TOMS may find they have to register for VAT overseas.

The new year also saw the introduction of new EU ‘place of supply’ rules. Agents who contract directly with overseas hotels/suppliers must now issue a VAT invoice to the overseas supplier. The agent must also submit EC sales lists setting out the total commission earned from each hotel/supplier in each quarter.

The hotel is then required to account for local VAT on the commission and the final selling price to the customer. This added cost could push up hotel rates as suppliers pass on these costs.

The rules could also have implications for agents dealing with bed banks. Wright added: “Sub-agents can no longer assume VAT liability rests with the overseas hotels. They may have to charge UK VAT on their commission from bed banks.”

Read an analysis on the new rules from MacIntyre Hudson principal Andrew Burnham.