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.