Martyne Pearson, Senior VAT Manager

In the current retail environment VAT is just another business cost to manage. The continued increase in VAT rates across the EU is far from welcome news for businesses in the travel sector.

It is industry practice for many travel businesses to set product prices yearly in advance. Therefore, for travel businesses who account for VAT under the Tour Operators Margin Scheme (‘TOMS’) any VAT rate increase will have a detrimental effect on the bottom line as most businesses contract on a VAT exclusive basis. If the VAT rate increase occurs in the country in which the travel business is established, additional VAT will be payable on the margin obtained from the sale of the travel product under TOMS. Travel businesses will also be impacted in respect of VAT rate changes in the countries in which the products are purchased. We have seen situation where the impact of both has resulted in low (and even negative) margins being obtained by some travel businesses, although clearly if the gross product cost increases this means the TOMS margin decreases and less VAT is due.

With the pressure to continue to remain competitive in the marketplace and the on-going decrease in consumer spending, an increasing number of businesses (not just those in the travel sector) are considering ways in which they can mitigate their VAT cost. Structures such as moving on to a disclosed agency model, relocating the business to a lower VAT rate jurisdiction or off-shoring the business to a non-EU location are now back on the boardroom agenda.

For non-EU established business supplying TOMS products, there is a clear competitive advantage to those who are supplying the products from an EU establishment as the EU Commission continues to try and agree a way in which the current loophole (allowing such sales to be VAT free), can be plugged. It is no surprise that businesses are taking a serious look (or re-look where off-shoring had been considered previously but dismissed) at this option and looking sideways at competitors who have made similar moves.

Clearly any business migration has to be supported by robust implementation to ensure the requisite functions have exited the original country and moved overseas.  We are advising an increasing number of clients with regard to these restructuring options so we are excellently placed to provide practical advice and support.

Now is the time to take a serious look at your business structure. 

To discuss this further please contact Julie Park or Martyne Pearson on 01962 735350.