Be careful what you wish for, says Abta’s director of finance and operations, Carolyn Watson
It’s a bit like one of those good news, bad news jokes…
VAT is a European tax and, in particular, the Tour Operators Margin Scheme (or TOMS, as it is affectionately known) is an EU scheme, and the UK’s exit from the EU has meant that change was inevitable.
So, here comes the good news. TOMS VAT is no longer payable on holidays etc. enjoyed in the EU. The Tour Operators Margin Scheme (VAT Notice 709/5) has been updated and requires the payment of VAT only on UK holidays and other UK travel, rather than the whole EU at present, but otherwise mirrors the existing arrangements in all other respects. The margin on all forms of travel enjoyed outside the UK is zero rated. The UK VAT treatment of travel services falling outside TOMS is also unchanged. Tour operators who do not sell holidays etc. in the UK are wholly zero rated within TOMS.
The new UK version of TOMS differs from the pre-Brexit scheme in two ways:
- The new scheme only applies to tour operators established (or with a fixed establishment) in the UK.
- The margin is standard rated only to the extent it is made on travel services enjoyed within the UK, the margin on travel anywhere outside the UK being zero rated.
All other aspects of the scheme remain the same. This means, among other points, that:
- the new TOMS only applies compulsorily to supplies made to non-business customers and to businesses for their own use (i.e. not for resale);
- B2B wholesale supplies fall outside the scheme unless the supplier opts to include them in TOMS;
- the definition of businesses to which the scheme applies remains as set out currently in S.53(3) of the VAT Act, and the list of service types that are considered to fall within the scheme – as set out in section 2.9 of Public Notice 709/5 – also remains unchanged;
- payments due continue to be calculated by reference to the supplier’s financial year and provisional payments will be made during each financial year based on the calculation for the preceding year;
- the meaning and taxation of in-house supplies remain the same;
- the tax point rules remain as now;
- UK input tax incurred on the direct cost of supplies within the scheme remains irrecoverable;
- cancellation income remains outside the TOMS calculation, provided that the departure tax point is in use;
- the UK treatment of in-house supplies, wholesale supplies and any other travel services falling outside the scheme remains as now.
So, for most tour operators this is indeed very good news, as TOMS VAT will no longer be payable except on UK packages (there are a number of transitional implications that are covered in our guidance note available on our website.)
And now for the bad news…
The question to ask is: do UK companies now have to register in the countries where their holidays in the EU take place? The rules on this are not clear, though historically third countries (which the UK now is) have not been required to register. The UK is a very significant market and a close neighbour however, and the EU is likely to regard the new UK position as uncompetitive with its own members. Indeed, the European Commission has prioritised the work looking at TOMS reform citing level playing field issues as one of the reasons for the need for reform.
More pressing, however, is that Germany announced on January 29 that third-country businesses should not be seen to fall within TOMS, which means that the “normal” VAT rules should be applied. This in turn means that UK tour operators selling German holidays need to register and pay VAT in Germany. This represents a new policy, effective from January 1, 2021, and applies equally to B2C and B2B transactions.
It is important to note that this is just the opinion of the tax authorities – it is not based on a change in the law or on new case law. The position under the EU VAT Directive remains ambiguous.
Nevertheless, it is now quite possible that the German authorities will start to approach UK (and other third country) businesses to seek their registration. Germany is also very influential, and other countries may well follow their lead. Indeed, at the time of writing, we have heard that Croatia may also be introducing similar legislation requiring registration of non-EU tour operators selling Croatian holidays, though the detail is still to be confirmed.
Normal VAT in any member state is likely to mean the payment of VAT at the appropriate local rate(s) on the selling price of the holiday etc. and the recovery of the local input VAT charged by hotels, attractions etc. It will be important to check that EU suppliers are issuing qualifying VAT invoices to support the recovery of the input VAT should they be needed at a later date. This can often be tricky as some suppliers may not issue VAT invoices because, for example, they have to account for VAT under TOMS or are just not VAT-registered. The administrative burden and potential cost of registering should not be underestimated.
So, what happens next?
It is advisable for tour operators to be prepared as other countries may follow suit. Therefore, they should: consider the VAT risk in the countries in which they operate, (many countries actually have lower VAT rates than here for travel services); consider registration and compliance costs; and, lastly, make sure VAT invoices are obtained from overseas suppliers.
Abta will continue to provide any updates in this area through Abta Today, its guidance notes on the website, and advice can be sought through our VAT helpline or from our partners with expertise in this area.
In the meantime, instead of the good news, bad news joke, how about:
German tax authority!
Not funny? I’ll get my coat…
Abta is hosting its 23rd annual Travel Law Seminar virtually on May 19. Early bird ticket sales end on May 7. Find out more here.