December 2012

The New year brings with it a new VAT rule for the B2C supply of the long-term hire of a means of transport.

With the exclusion of the long-term hire of a pleasure boat, the place of supply for VAT purposes will change from the place where the supplier has established his business to the place where the customer belongs. Long-term hire means 30 days or more for all transportation with an exception of the long-term hire of a vessel (in which case the period is 90 days or more).

What are the New Rules?

Where the supplier and the customer belong in the same country this will mean that there will be no change to the current VAT treatment applied – the supplier will continue to charge local VAT.

– However, where the customer belongs in another EU Member State this will mean that the supplier will have a requirement to register and charge local VAT in the country in which the customer belongs.

How do I determine where my customer belongs?

The customers’ place of belonging is his usual place of residence.

– The usual place of residence of an individual is not defined in the VAT legislation.

– HMRC interpret the phase according to the ordinary usage of the words – meaning the country were the individual has set up home with his  family and is in full-time employment.

– An individual is not resident in a country if only visiting as a tourist.

With the intending changes to the personal tax residency rules that are also due to come into play next year, suppliers affected by the change will need to carefully consider the evidence obtained to support its customers usual place of residence. This will obviously have a knock-on effect to how the supplier will account for VAT and its wider compliance obligations.

Please let us know if you would like to discuss this issue in more detail. You can call us on 01962 735350.

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.