By Martin Pooley, Toms VAT consultant

The European Commission took eight member states to the European Court of Justice (ECJ) over their Tour Operators Margin Scheme (Toms) rules and the Advocate General (AG) issued two opinions on June 6.

The first opinion covers wholesalers. The Commission says that an operator selling travel arrangements to a business which in turn resells them is acting as a wholesaler and Toms does not apply.

The eight member states concerned tax all B2B supplies under Toms, including wholesale supplies.

There is a consensus that it is theoretically preferable for Toms to apply to wholesalers but the Commission has not been able to achieve this objective.

So it is not surprising that the AG declined to lean the opposite way and to require member states to exclude wholesalers from Toms.

I am not convinced that this will produce a volte-face in the Commission on wholesalers but if wholesalers are eventually brought into Toms it would presumably stop the transport company scheme.

This would give vertically integrated tour operators with their own inhouse transport a VAT advantage over other operators supplying transport to EU destinations.

This issue will grab the headlines in the holiday sector but there are many businesses making B2B supplies which would be affected by a change in the wholesaler rules.

The second opinion covers three other issues only taken against Spain. Two of these issues have potentially greater implications for Toms in the UK than the wholesaler issue even if they do not grab the headlines.

The AG agreed that Spain’s practice of calculating the margin globally was contrary to basic principles of VAT.

VAT should be calculated transaction by transaction. The global calculation always was an obvious defect of the UK scheme and changing this would require a fundamental redesign of all aspects the UK scheme.

For example under the UK global scheme non-EU destinations are generally included in Toms reducing the liability on EU destinations. See paragraph 72 of my notes on my website.

If the VAT is calculated transaction by transaction in the future then non-EU destinations will simply be omitted and many operators will see their liabilities increase.

The AG said that tour operators should be able to issue VAT invoices showing the VAT they have charged.

This is contrary to the position in the UK. Her Majesty’s Revenue and Customs (HMRC) say that tour operators cannot issue VAT invoices showing the VAT on their margin or in-house supplies so businesses cannot reclaim it.

UK operators making supplies to other businesses may now wish to start issuing VAT invoices. However, disclosing the VAT on the margin is tantamount to the operator disclosing their margin which has commercial implications.

Under EU law Toms has always disallowed VAT on direct costs in the hands of the tour operator and this is not set to change so there will still be one layer of irrecoverable VAT on B2B supplies under Toms.

EU-wide reform of Toms has long been mooted but is beset by politics and complications and I do not believe there is sufficient consensus for major change in the foreseeable future.

But if there is change in the UK it should follow a fundamental review of the UK scheme, including moving to a transaction by transaction approach, not just abolition of the transport company scheme.

Be careful what you wish for.