Julie Park is managing director of The VAT Consultancy

After Spain and Germany, it’s Iceland’s turn to announce a significant VAT hike to hit the travel trade.  

The VAT rate currently applied to accommodation, restaurant meals and tourist attractions will treble – an odd move for a country that owes its embryonic recovery, after the near economic meltdown of recent years, in great part to tourism.

Not only does this move threaten the flow of tourists attracted by the relative weakness of the Icelandic currency, but it also puts at risk a whole industry that plans months ahead.

In the last year there has been a raft of VAT rate changes including the German VAT rate increase on river cruises from 7% to 19%, the Spanish VAT rate increase on public transport, hotels and processed foods from 8% to 10% and many countries (including Ireland, Hungry, France and the Czech Republic) introducing increases to their VAT rates.

Tour operators setting brochure prices 12 to 18 months in advance could not have foreseen these rate changes and the speed at which they have been introduced.

In most cases, the short transition times have made it difficult for tour operators to manage expectations in respect of budgeting costs and system change requirements.

Technically the tour operators will bear the cost of the VAT rate increases.

However, in the case of those who have been savvy enough to contract on a VAT inclusive basis, it will be the supplier and ultimately the customer who will suffer, as suppliers will be forced to cut costs and service levels in forthcoming seasons to fund the additional VAT cost.

Countries in dire need of generating extra revenue see tourism as a ‘safe’ option that does not impact domestic businesses en masse and potentially create unrest. 

It shows desperation though that countries where tourism is one of the main sources of revenue such as Spain have chosen to go down the route of taxing in-bound tourism.

By contrast, the likes of Greece have strategically chosen to delay increases to their current rates in order to try to boost their local economy with tourists.

With the pressure to continue to remain competitive in the marketplace and the on-going decrease in consumer spending, many businesses (not just those in the travel sector) are considering ways in which they can mitigate their VAT cost.

Structures such as moving on to a disclosed agency model, relocating the business to a lower VAT rate jurisdiction or off-shoring the business to a non-EU location are now back on the boardroom agenda.

Non-EU based businesses supplying products under the Tour Operators Margin Scheme (TOMS) have a clear competitive advantage over those supplying the products from an EU establishment, as the EU Commission is aiming to find ways to plug the current loophole (allowing such sales to be VAT free). 

It is no surprise that businesses are taking a serious look at this option and looking sideways at competitors who have made similar moves.

Clearly any business migration has to be supported by robust implementation to ensure a smooth transition of all the requisite functions from the original country to the overseas base. 

Whilst these types of structures have been previously considered and dismissed, many businesses are being forced to revisit their options in order to remain profitable.

Watch out. We may see an exodus of companies fleeing the EU, which would defeat the very purpose of the VAT hikes.