Opinion: Court dashes agents’ hopes for VAT reclaims

By Damon Wright, VAT director, travel and tourism of BDO

It may be a new year but there’s no happy news for UK travel agents on the VAT front.

On January 16, in a case brought by German travel agent Ibero Tours, the Court of Justice of the European Union (CJEU) emphatically rejected the argument that a travel agent is entitled to reclaim VAT in respect of self-funded customer discounts.

What did the court rule in the Ibero Tours case?

Ibero Tours sold holidays on behalf of tour operators, earning commission on its sales. It granted discounts to customers booking holidays or other travel services, which it funded itself.

Having accounted for VAT on its full (pre-discount) commission, Ibero Tours submitted a claim for overpaid German VAT on the basis that the discounts reduced the amount of commission it retained (after releasing the expected balance to the tour operator).

The claim was based on principles established in a 1996 case, Elida Gibbs, where the court agreed that VAT on goods was due only on the actual amount paid by the end consumer.

Therefore, manufacturers that provide consumer refunds via vouchers or cashbacks could reclaim the VAT on the value of these, even though the consumer may have bought the goods from a completely separate retailer.

In a 2003 First Choice Holidays case, the CJEU confirmed that tour operators could not adjust their Toms calculations in respect of any discounts applied by agents without their formal agreement.

Now the CJEU has gone one step further and totally rejected Ibero Tours’ argument that as the agent providing the discount it should be able reclaim the VAT instead.

Sadly, even though the consumer actually pays a lower amount, the CJEU has concluded that the discount given by the agent cannot change the value of the sale – either from the tour operator to the consumer or the travel agent to the tour operator.

This is because the tour operator would still receive the same net balance plus a VAT invoice for the full (pre-discount) commission, and would recover the VAT on this.

Therefore, there is absolutely no basis on which either party can reclaim any VAT in respect of the discount.

What does this mean ?for UK travel agents?

Many UK travel agents submitted VAT claims to HMRC based on this argument. The lead case in the UK is the Tui Travel plc appeal which, after its claim was rejected by the first-teir tribunal last year, is awaiting a hearing date at the upper-tier tribunal.

It is possible that this appeal will continue for the time being. However, with the court giving such an emphatic ‘no’ in a case with almost exactly the same fact pattern, it now seems very unlikely that Tui’s appeal can succeed.

Therefore, although agents should not withdraw any claims unless and until they are finally rejected in the UK courts, I would not suggest they hold out much hope of these ever being successful.