Last week, HMRC issued a technical note which announced the withdrawal of a number of VAT extra-statutory concessions. The withdrawal of the concessions has come about further to The House of Lords’ decision in the Wilkinson case which clarified the scope of HMRC’s administrative discretion to make concessions that depart from the strict statutory position. Those concession that have been identified as being beyond the scope of HMRC’s discretion will need to be withdrawn.
The note included five VAT concessions which are due to be removed with effect from 1 April 2015. These include the following Tour Operator Margin Scheme (‘TOMS’) concessions that have been used by the industry for a number of years:
• TOMS and the use of a fixed rate margin (10%) for shore excursions sold by cruise operators – this is the current concessionary treatment which allows cruise operators to use a fixed rate 10% margin to determine the VAT due on sales to cruise passengers of bought-in shore excursions; and
• TOMS and the Airline Charter Option – the concessionary treatment allows tour operators to treat certain supplies of a charter flight, which they have bought-in and sold on to a traveller, as an in-house supply of zero-rated passenger transport.
What’s the Impact?
On first review the impact would seem relatively straightforward:
• Cruise operators will have to account for bought-in shore excursions, which are sold on as principal, using the TOMS; and
• Tour operators who are applying the Airline Charter Option would have to account for UK VAT under TOMS where the charter flight is bought-in and re-supplied as a principal.
However both of these changes will result in additional VAT due to HMRC in respect of EU travel, and the potential erosion of profit margins if businesses are unable to pass the VAT cost on to their clients.
The Wider Impact
Although it could be said that the withdrawal of the TOMS concessions will impact only on a minority within the travel industry, what is more of a concern is the potential wider impact of the updated guidance that will be issued on what constitutes “material alteration” and/or “further processing” (as referred to in the Airline Charter section of HMRC’s note).
It seems the Airline Charter Option is considered to be ultra vires due to the fact that the travel products supplied under the option are not considered to be significantly ‘materially altered or further processed’. However, HMRC’s note does not explicitly state whether the in-house definitions relating to coach/rail, cruises and accommodation are also going to change.
It would seem strange for only the in-house guidance on air transport to change when other areas have not (as the broad thrust of the guidance for all in-house areas is the same and the principles are clearly understood within the industry).
We are currently liaising with the HMRC Policy team to understand the wider implications of the withdrawal of the concessions and their intentions with regard the revised TOMS guidance. We will continue to update you on the position. In the meantime, if you would like to discuss the HMRC note and/or its implications in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at martyne.pearson@thevatconsultancy.com
