Opinion: VAT hikes on tourism are putting firms on migration watch
Julie Park, Managing Director
After Spain and Germany, it’s Iceland’s turn to announce a significant VAT hike to hit the travel trade.
The VAT rate currently applied to accommodation, restaurant meals and tourist attractions will treble – an odd move for a country that owes its embryonic recovery, after the near economic meltdown of recent years, in great part to tourism.
Not only does this move threaten the flow of tourists attracted by the relative weakness of the Icelandic currency, but it also puts at risk a whole industry that plans months ahead.
In the last year there has been a raft of VAT rate changes including the German VAT rate increase on river cruises from 7% to 19%, the Spanish VAT rate increase on public transport, hotels and processed foods from 8% to 10% and many countries (including Ireland, Hungry, France and the Czech Republic) introducing increases to their VAT rates.
Tour operators setting brochure prices 12 to 18 months in advance could not have foreseen these rate changes and the speed at which they have been introduced.
In most cases, the short transition times have made it difficult for tour operators to manage expectations in respect of budgeting costs and system change requirements.
Technically the tour operators will bear the cost of the VAT rate increases.
However, in the case of those who have been savvy enough to contract on a VAT inclusive basis, it will be the supplier and ultimately the customer who will suffer, as suppliers will be forced to cut costs and service levels in forthcoming seasons to fund the additional VAT cost.
Countries in dire need of generating extra revenue see tourism as a ‘safe’ option that does not impact domestic businesses en masse and potentially create unrest.
It shows desperation though that countries where tourism is one of the main sources of revenue such as Spain have chosen to go down the route of taxing in-bound tourism.
By contrast, the likes of Greece have strategically chosen to delay increases to their current rates in order to try to boost their local economy with tourists.
With the pressure to continue to remain competitive in the marketplace and the on-going decrease in consumer spending, many 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.
Non-EU based businesses supplying products under the Tour Operators Margin Scheme (TOMS) have a clear competitive advantage over those supplying the products from an EU establishment, as the EU Commission is aiming to find ways to plug the current loophole (allowing such sales to be VAT free).
It is no surprise that businesses are taking a serious look 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 a smooth transition of all the requisite functions from the original country to the overseas base.
Whilst these types of structures have been previously considered and dismissed, many businesses are being forced to revisit their options in order to remain profitable.
Watch out. We may see an exodus of companies fleeing the EU, which would defeat the very purpose of the VAT hikes.
First published in Travel Weekly on 19th September. If you would like any further information on this or any other VAT issue please contact Julie Park on 01962 735350.
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