The travel press reported yesterday that the Spanish Government is considering increasing the VAT rate on hotel rooms and other services, in an attempt to raise revenue and reduce the country’s deficit.

The current standard rate of VAT in Spain is 18%. However, a number of services including the provision of hotel accommodation are subject to the reduced rate of 8%.

Whilst this might be good news for the Spanish economy, any VAT rate increase will have a detrimental effect on travel businesses accounting for VAT under the Tour Operators Margin Scheme (‘TOMS’) as they cannot recover the VAT they incur on these costs. For such businesses brochure prices are often set a year in advance, whilst invoices from supplies are often received after the supply has been made by the travel business to the customer.

Although travel businesses are able to include the VAT inclusive cost charged by the supplier in its TOMS calculation (the effect of which would reduce the overall amount of VAT payable under TOMS on the profit margin), the overall effect will be a decrease in profit in the region of 10% – another example of how the industry is being affected by the current economic climate.

If the change goes ahead, TOMS providers will need to carefully consider their existing business models to determine whether it is still viable to continue operating on this basis. Will this push more operators to considering off-shoring their businesses to take advantage of a more preferential VAT position? We can only wait and see.

If you have any concerns regarding the above or if you would like to discuss alternative business models, please contact Martyne Pearson and Julie Park on 01962 735350.