By Damon Wright, VAT director – travel and tourism, BDO LLP
The European Court (CJEU) may have just provided a watershed moment in the application of VAT for UK travel companies.
Led by the case involving Spain, Case C 189/11 European Commission v Kingdom of Spain and seven other member states, the CJEU was asked to rule on the correct application of the VAT Tour Operations Margin Scheme (Toms) in two key areas relevant to the UK’s approach:
- Does Toms apply to B2B wholesale supplies (bought for resale by the buyer) or just retail supplies (sales for consumption by the buyer)?; and
- How should travel businesses calculate the VAT payable under Toms?
Based on its understanding of the EU legislation, and edicts issued by EU Commission, the UK approach to the application of Toms is, relatively, benevolent (certainly compared to some EU member states), in that it allows UK travel businesses some scope to manage the amount of standard rated TomsVAT payable.
Retail tour operators, who are able to, use what is called the Transport Company Option, allowing them to apply zero rated (0%) VAT to the margin on passenger transport elements of EU destination travel on the basis that there is a wholesale sale from a transport company to the tour operator business (which would otherwise be subject to 20% VAT).
The UK’s annual gross margin calculating method, together with variances in the type of method that can be used, allows UK tour operators to control the overall margin subject to 20% VAT, through offsetting losses on some sales against profits on others and offsetting margin on EU businesses against reduced margins on non-EU sales.
UK-based wholesale suppliers (such as accommodation brokers, Atol to Atol flight providers etc) treat supplies as outside of Toms and subject to VAT under the normal EU VAT liability and place of supply rules, which invariably means their supplies are zero rated or outside the scope of VAT due to the different application of the Toms rules by other EU member states.
However, in its decision released yesterday, the CJEU has stated that both wholesale and retail supplies are subject to VAT under Toms and that Toms VAT must be calculated on each transaction and not on the gross margin over an extended period.
Given that the CJEU is the highest authority for the application of VAT across the EU, strictly speaking the UK is obliged to amend its VAT legislation to comply with these interpretations. Of course, if it does, the implications for the UK travel industry will be significant.
Basically this is what it means:
- the Transport Company Option may no longer be effective, as UK transport companies could have to pay 20% UK VAT on the margin of all EU transport (although see below)
- UK companies applying Toms would not be able to offset losses on some sales against profits on others;
- UK companies applying Toms with mixed EU and non-EU supplies would no longer gain a benefit of offsetting reduced margins on non-EU sales against margins on the EU ones;
- UK based wholesale suppliers (accommodation brokers, Atol to Atol flight providers etc) may now have to account for 20% UK VAT on the margin for all EU products.
Therefore, traditional UK tour operators and other businesses (such as wholesalers now caught within the Toms scheme) may need consider whether they can pass on the additional costs to customers, which can be difficult to do in such a highly competitive market, or look to change their business models to match those companies who fall outside of the Toms remit (agencies, non-EU businesses etc).
That said, with the outcome of the case being so wide-ranging, impacting across the EU and not just the UK, it is distinctly possible that Her Majesty’s Revenue and Customs/UK Treasury, and the authorities in other member states which apply the rules differently to the Court’s conclusion, will approach the EU Commission as well as perhaps UK industry representatives for discussions before going down the route of implementing any new legislation.
Especially as the decision on Toms for wholesale transactions focuses on businesses combining a ‘package’ of travel services rather than those selling single services. (Although it should be stressed that an earlier, 1992, ECJ case known as Van Ginkel specifically confirmed that, in the right/wrong circumstances Toms does apply to single services).
Therefore, hopefully, we will have some time to digest and plan for the implications and seek alternative options for mitigating against any additional VAT cost before the decision fully bites.