A European Court of Justice (ECJ) ruling on the VAT treatment of tour operators’ wholesale supplies has profound implications for the UK trade, say tax specialists.
The ECJ ruling, issued on Thursday, comprises a series of judgments on the application of VAT under the Tour Operators Margin Scheme (Toms).
The court ruled that Toms VAT should apply to wholesale tour operators – who supply other businesses rather than sell to consumers – across the European Union.
Up to now, Toms has applied to wholesale suppliers in some EU countries and not in others, including the UK.
The decision will affect the margins of inbound tour operators, ground handlers and conference and event organisers whose business-to-business activities have previously been zero-rated for Toms.
It could also affect many smaller UK outbound tour operators as it seems likely to end a long-standing arrangement which allows these companies to avoid Toms on the transport portion of a European package holiday (typically the flight).
The so-called ‘transport company scheme’ exemption in the UK, introduced in 1996, means tour operators typically do not pay Toms VAT on the flight part of a package contracted from another company.
The ruling also threatens to change the way Toms is calculated – moving from a single annual assessment to a calculation transaction by transaction.
Deloitte VAT partner Daniel Barlow said: “This judgment raises a number of big questions. The first is how much lead-in time the sector will be given to adjust pricing and systems.
“A short lead-in time could erode margins if prices have been set assuming VAT will not apply.
“Second, Toms only applies to tour operators established in the EU. If the wholesale market moves to non-EU locations, this will probably trigger the EU to reform the entire Toms system.”
There is also a question, he said, “whether tour operators will be able to continue the transport company arrangements”.
His view was supported by accountancy firm BDO which calculated the ruling could add 3% to UK tour operators’ and wholesalers’ costs.
BDO head of indirect tax Tom Kivlehan said: “Companies will need to consider whether they can pass on the additional costs to customers.”
In a statement, Abta chief executive Mark Tanzer said: “This could have significant implications for members who are wholesalers and those who take advantage of the Transport Company Scheme.
“The ECJ has also ruled Toms must be calculated transaction by transaction and not on a global basis as is the current case in the UK, which has potentially significant cost implications.”
The judgment came in cases brought by the European Commission against Spain, Poland, Italy, the Czech Republic, Greece, France, Finland and Portugal.
The court decided Toms “must be determined by reference to each single service supplied . . . not on an overall basis”.
A spokesman for Revenue and Customs (HMRC) said: “We are considering the implications of the judgment carefully.”
Abta said: “We will issue further information as soon as we have fully digested the implications.”