In addition to not being welcomed by the Spanish people, who fear a drop in tourism, any VAT rate increase will have a detrimental effect on UK travel businesses accounting for VAT under the Tour Operators Margin Scheme (TOMS).
For such businesses, brochure prices are typically set a year in advance, while invoices from suppliers are often received after the supply has been made by the travel business to the customer.
Other supplies such as the provision of food and drink in restaurants, local tours and car hire will now also be caught by the rise in the standard rate of VAT.
The two VAT rate increases announced by the Spanish Prime Minister will come into effect on 1 September 2012 with the first being an increase in the standard rate of VAT from 18% to 21%.
The second is a VAT rate increase on public transport, hotels and processed foods (which will include food supplied in restaurants and bars) from 8% to 10%.
Although travel businesses are able to include the VAT inclusive cost charged by the supplier in their 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 significant decrease in profit.
These latest tax rises follow the introduction of a Spanish airport tax at the beginning of this month, adding up to £7 to the cost of flights. Most airlines have agreed to waive costs for the airport tax for those who had already bought tickets. However, some have said that they will charge customers retrospectively.
These and the wider measures to be introduced are aimed at cutting the public budget by £51bn. Whilst these changes have been welcomed by EU officials as they have been made in return for a Eurozone bank bailout, they may in fact have a detrimental impact on the Spanish tourism industry if travellers choose to holiday in other destinations.
Countries such as Greece are considering cutting the VAT rate to encourage inbound tourism, while interestingly other countries such as Germany have chosen to increase the VAT rate on local river cruises from the reduced rate to the standard rate. However Germany is in a much stronger financial position.
It is therefore unclear whether other countries will follow suit and look to increase or decrease the VAT rate on travel supplies. It appears from our observations that the Spanish move might prove to be a double-edged sword, defeating the objectives if less people travel there and even perhaps triggering a downward spiral and damaging Spain’s crown jewel.
First published in Travel Weekly on 12th July 2012. If you would like further information on this issue, please contact Julie Park on 01962 735350.