26 September 2013

Tax Services

Tour Operators’ Margin Scheme: Major developments in the CJEU The Court of Justice of the European Union (CJEU) has released its judgment today regarding infringement proceedings brought by the European Commission against eight EU Member States in relation to their implementation of the Tour Operators Margin Scheme (TOMS).

Although the UK was not a party to the proceedings, three key findings conflict with current UK practice:

a) the TOMS should include wholesale supplies – ie travel services sold to tour operators for re-sale to the public;

b) TOMS VAT must be computed on a transaction-by-transaction basis – not by reference to purchases and sales over a period of time; and

c) it is permissible in principle for TOMS VAT to be shown on an invoice to enable business customers to exercise their right to deduct input VAT if appropriate.

Background

Under VAT Directive 2006/112/CE, where a tour operator, acting in his own name, uses the supplies and services of other taxable persons in the provision of a travel package, all the transactions are to be treated as a single supply, subject to VAT in the tour operator’s Member State. The taxable amount of this supply is deemed to be the tour operator’s margin, namely the difference between the price (exclusive of VAT) of the travel package and the VAT-inclusive cost of the supplies and services forming part of that package.

In 2008, the Commission sent reasoned opinions to eight Member States - Spain, Poland, Italy, Czech Republic, Greece, France, Finland and Portugal – on the grounds that their TOMS legislation was considered to be incompatible with EU Law.

The primary issue was whether the TOMS should include travel packages sold to all customers including companies who re-sell those packages to the public (the “customer approach”) as implemented by the countries, or whether the TOMS should be limited to travel packages sold to the actual traveller (the “traveller approach”) as argued by the Commission.

Tour Operators’ Margin Scheme: Major developments in the CJEU 2

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The Commission also objected to three other aspects of the Spanish legislation which (i) excludes from the margin scheme sales by retail travel agents of travel packages organised by wholesale agents, (ii) allows the application of a notional 6% VAT rate to the total price of the package with the possibility for VAT taxable customers to recover it as input VAT (such measure being only available for local supplies in Spain) and (iii) the possibility for travel agents applying the margin scheme to calculate a single profit margin for all travel packages sold in a given tax period (which is also permitted under UK VAT legislation).

The case went before the CJEU.

The Judgment

The CJEU found in favour of the countries and upheld the “customer approach”.

Regarding the three other issues raised in relation to Spanish Law the CJEU has upheld the Commission’s position.

In particular, it found no legal basis for VAT to be computed by reference to all transactions performed within a tax period. Rather, VAT had to be determined on a transaction-by-transaction basis.

Moreover, the adoption of a 6% VAT rate for the purposes of issuing a VAT invoice and for input tax recovery purposes was not compatible with EU law.

What is the impact for UK businesses?

The implications are potentially serious and far-reaching. We await HMRC’s reaction.

The judgment is contrary to HMRC’s current treatment of wholesale supplies which come under normal VAT rules. This could also impact those tour operators who currently manage their TOMS VAT liabilities using a transport company or trader-to-trader arrangements.

The requirement to account for TOMS VAT on an individual transaction would present major systems challenges and severe practical difficulties. It could also result in increased taxation.

Moreover, tour operators selling to taxable customers appear, in principle, to fall within the obligation to issue a VAT invoice. It will be necessary to consider the practical and commercial implications of such a requirement.

On a more positive note, any UK businesses that have registered for and paid VAT in other EU countries on the basis that wholesale transactions were treated as outside the TOMS and thus subject to normal VAT rules, may wish to review their position.

Further information

EY has a global Indirect Tax practice which is experienced in providing support in relation to technical VAT issues. If you feel that the case could potentially have implications for your business, and you would like to discuss the position in more detail, please speak with your usual EY Indirect Tax contact or one of the following:

Mike Lambourne mlambourne@uk.ey.com 020 7951 6319

Joanna Crookshank jcrookshank@uk.ey.com 020 7951 1662