More VAT Rate Increases for the Tourism Sector
In late December 2012, the Icelandic parliament approved a number of changes to the rate of VAT on hospitality services, movie tickets, and certain personal – use items.
With effect from 1 January 2013, movie tickets to Icelandic films are no longer exempt from VAT, but are subject to the standard VAT rate of 25.5%.
Another VAT change effective from 1 September 2013, is the VAT rate on the rental of hotel and guestrooms and other accommodation (including campsite facilities) will increase from 7% to 14%.
Those operating under the Tour Operators Margin Scheme do not have to pay UK VAT on the onward supply of these services. However, the VAT incurred on the purchase of such items is a cost to the travel business due to the fact that the VAT cannot be recovered. For travel businesses who have already agreed 2013 brochure prices which include Icelandic content (such as hotel accommodation) these VAT rate changes will have a significant impact on their profit margins. Those currently negotiating the 2014 brochure prices will need to factor in these additional costs to ensure that the current level of profit is maintained.
If you would like any further advice on this or any other VAT issue, please contact Martyne Pearson on 01962 735350.
HMRC Success in Med Hotels Case – What is the impact for the sector?
The Court of Appeal has released its decision in the Secret Hotels 2 Ltd (formally the Medhotels) case – the Upper Tribunal decision has been overturned, with the Court of Appeal reaching the same conclusion as the First Tier Tax Tribunal.
The appeal, heard in July 2012, concerned whether the bed bank operated as an disclosed agent or principal, the latter making it liable for VAT under the Tour Operator Margins Scheme (‘TOMS’). In making its decision the Court of Appeal placed particular weight on the following facts and concluded that MedHotels was not simply supplying agency services but was itself buying in and re-supplying the services in its own name.
1) MedHotels dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents;
2) MedHotels dealt with holidaymakers in its own name (and not as an intermediary) in those cases where the hotel operator was unable to provide accommodation offered;
3) MedHotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator;
4) MedHotels used the services of other taxable persons (the hotel operators) in the provision of the travel facilities marketed through its website;
5) MedHotels did not provide the hotel operators located in other EU countries invoices in respect of its commission making it impossible for hotel operators to comply with their obligations to account for local VAT on the full selling price of the product; and
6) MedHotels treated deposits and other monies which it received from holidaymakers and their agents as its own monies – it did not enter those monies into a client suspense account nor did it account to the hotel operator for those monies.
Travel businesses operating on a similar model to MedHotels are at risk of challenge by HMRC if their fact pattern is similar. For those business operating tight margins the application and additional VAT payable under TOMS could be enough to wipe out all profit obtained from the sale of EU holiday products.
Although the case specifically refers to the sale of hotel accommodation, the same principles are likely to apply to other travel products sold on the same basis (such as the sale of flights on an undisclosed agency basis). Businesses caught by this decision should therefore look at the wider picture and not just at the sale of hotel accommodation.
In light of this decision some travel business may have no option but to consider mitigating their VAT position. For those providing passenger transport, the UK Transport Company concession may be of benefit if not already implemented. Others may be forced to consider more radical options such as off-shoring the business to a non-EU location. 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. Clearly any business migration has to be supported by robust implementation to ensure the requisite functions have exited the original country and moved overseas.
It may not be the end of the road for the case if MedHotels is given leave to appeal to the Supreme Court. However, the outcome of the Court of Appeal will give some no option other than to consider whether it is still viable to operate under their existing arrangements.
Please contact Martyne Pearson on 01962 737 961 or via email martyne.pearson@thevatconsultancy.com if you have any questions regarding the above.
VAT hike could plunge Spanish tourism into a downward spiral
Julie Park, Managing Director
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.
Possible Spanish VAT rate rise: good news for Spain but not for UK Travel Businesses operating TOMS
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.
Will the new Flight-Plus arrangements have any impact on your VAT position?
Martyne Pearson, Senior VAT Manager
There have been a number of changes during year regarding ATOL protection for the consumer.
In April we saw the introduction of the new ‘Flight-Plus’ ATOL arrangement. Flight-Plus has brought so called dynamically packaged holidays into the scope of ATOL. Deals sold by travel agents or tour operators where the consumer has the flexibility to match together their preferred flights with their preferred accommodation within a two-day time period – are now covered under the newly extended ATOL scheme. However, this protection does not apply where the ‘package’ is booked through an airline or where the travel agent or tour operator is acting as an agent for the consumer.
From October, a certificate will be issued to each consumer to clarify whether protection is provided. At present retail agents for ATOL holders do not hold ATOLs themselves but act as agents of others that do. It is a legal requirement that agents inform customers on which ATOL holders behalf they are accepting the booking before payment is made to them. It is expected that post October, the retail agent will have to provide a copy of the ATOL holders certificate to the consumer. There will be more focus on agency agreements in order to ensure that retail agents are acting on behalf of another ATOL holder and do not have a liability themselves to apply for an ATOL or Flight-Plus ATOL.
The VAT and regulatory position on whether a travel business is acting as an agent or principal has never been aligned. For UK VAT purposes, where you act as an undisclosed agent (where the consumer thinks you are the supplier of the services) or principal then your supplies will be caught within the Tour Operators Margin Scheme (‘TOMS’) and VAT will be due on the profit margin obtained from the sale of EU travel products. Where you act as a disclosed agent VAT would only tend to be due where you earn a commission from a UK travel supplier or where you charge an identifiable administration fee etc. to the consumer. Disclosed agents often have a competitive advantage over those accounting for UK VAT under TOMS. The issue of dynamically packaged holidays has always been a grey area as dependent on the contractual position the supplies could fall into either camp.
The VAT treatment of agency supplies has been subject to the ongoing litigation in the ‘Secret Hotels’ (formally Medhotels) case. For those not familiar with the case, the issue in question is whether Secret Hotels acted as an agent or principal for the sale of hotel accommodation. HM Revenue & Customs assessed Secret Hotels for £6m VAT on the basis that they considered it to be making supplies that fell within TOMS. The case currently sits with the Court of Appeal and is expected to be heard in due course. Many businesses are awaiting the outcome of the Court of Appeal’s decision with interest.
With the arrival of Flight-Plus and the ongoing VAT litigation in this area, many businesses are taking steps to ensure that where they do act as an agent that it complies with both regimes. The VAT Consultancy has significant experience of advising businesses in these areas.
Therefore, if you do have any questions regarding your VAT or regulatory position please contact Martyne Pearson on 01962 735350
Olympics Hotels & No-Shows
Martyne Pearson, Senior VAT Manager
There has been much noise in the travel press this week around the Olympics and sports fans who have booked packages for tickets only. It has been reported that sports fans who have bought tickets and hotel packages may be trying to offload the hotel portion. Some packages include hotel accommodation which is located miles away from the event venue. Packages have in some cases been purchased by individuals who live right next to the venue.
With regard to the above, it is expected that there will be a number of no-shows where the hotel room element will not be taken up by the individual.
The VAT treatment from no-show income has in the past been subject to debate. Initially, it was thought that the income generated from the sale of UK hotel accommodation should be subject to VAT at the standard rate (either on the full selling price or on the margin if the supply fell within the Tour Operators Margin Scheme). This was on the basis that as the hotel room was being held for the individual, a supply of services had been made in return for the payment. This was the case even though the hotel room had not been used.
It is now accepted by HM Revenue & Customs that income generated from a non-show (i.e. where the customer does not take up the hotel room) can in certain circumstances be treated as outside the scope of UK VAT. This is on the basis that it is industry practice for hoteliers to over book capacity so hotel rooms are often not allocated until arrival. As there has been no service provided to the individual, there can be no taxable supply for VAT purposes. The payment received will be treated as a form of compensation and will be outside the scope of UK VAT.
The above is the treatment that will often be applied by the initial hotelier who supplies the room directly to the customer. The position with regard to supplies made by travel agents and tour operators accounting for VAT under TOMS is likely to be different. These businesses are likely to continue to incur the cost of the hotel room from the hotelier (as in some cases inventory is purchased in advance of the sale being made). The question therefore is whether these businesses will be able to make an adjustment in their TOMS calculation in respect of the provision of hotel accommodation that is effectively not taken up?
With regard to the above, we would recommend that any business selling hotel accommodation reviews its position and seeks advice if they are not sure how they should be accounting for VAT on these receipts.
If you would like more information or to discuss your VAT position in more detail please contact Martyne Pearson on 01962 735350.
Business Migration – Come fly with me?
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.
Will the Travel Industry be paying more VAT?
The Department for Transport is shortly to consult with the travel industry on extending Atol protection to dynamic packages eg packages involving a flight plus hotel accommodation.
As was the case a number of years ago when the industry first started offering dynamic packages, the question has arisen as to whether this will lead to increased VAT liability, potentially due to the common misconception that the Tour Operator’s Margin Scheme (TOMS) applies to the sale of holiday packages.
The test is not one of whether a package is sold. In general terms the TOMS only applies if the constituent elements are bought in from a third party and sold on, and importantly only where the travel business is acting as a principal or undisclosed agent as opposed to a disclosed agent. In addition TOMS can apply if stand-alone passenger transport or hotel accommodation is bought and sold as principal – it does not have to be sold in a package. For example, if an airline creates a package consisting of a flight on its own aircraft and hotel accommodation it has arranged as disclosed agent, there is no TOMS liability. If the hotel accommodation is bought in the travel business’ name however, potentially with an undisclosed mark-up added before on-selling as part of the dynamic package, the margin scheme would apply to this element of the package. The flight element would effectively remain VAT free. Even where the flight is bought in from a third party and sold on as principal, VAT mitigation strategies including the transport company arrangements could be used to remove the VAT cost created by having to account for TOMS VAT on the flight.
In short, unless the contractual arrangements with underlying suppliers and customers change, there should be no impact on the VAT position. Furthermore, due to the existence of the widely used VAT mitigation structures supported by HMRC, there are few situations in which it is necessary for travel businesses to be suffering a VAT cost in relation to the sale of passenger transport as principal.
If you would like to discuss these structures or any of the above in more detail please contact Julie Park on 01962 735350
VAT and Travel – EU playing field levelled
The European Commission has published a press release regarding the infringement proceedings against a number of Member States in relation to the way in which they have implemented the TOMS legislation – click here for details.
TOMS is the VAT margin scheme for the travel industry and is effectively aimed at retail as opposed to wholesale transactions where the travel business acts as principal. The Member States named in the attached (and some others historically) apply TOMS to both retail and wholesale transactions which has lead to an imbalance in treatment between Member States.
For example, a UK established tour operator selling a French package as principal on a wholesale basis would not be required to account for UK VAT under TOMS as the UK correctly does not subject such transactions to TOMS. As far as HMRC are concerned, the normal VAT rules apply, so the majority of the supply (eg the accommodation element) is subject to VAT in France. However if the UK business tried to VAT register in France to account for French VAT, the French Tax Authorities would not require them to do so on the basis they would regard them as a tour operator accounting for UK VAT under TOMS. This means the transaction is not subject to VAT (although the French VAT incurred on the purchase of the hotel would clearly be irrecoverable). If a French tour operator had sold the same package on a wholesale basis it would have had to account for French VAT under TOMS, hence the imbalance.
The impact of the impending changes could mean certain wholesale tour operators established in the UK (and some other Member States operating TOMS correctly) face an increased number of VAT registration liabilities in the EU and a corresponding increased VAT and compliance cost.
If you would like further information on this and other travel VAT issues contact Julie Park, julie.park@thevatconsultancy.com or on 01962 735350.