The decision of the CJEU in The European Commission v The Kingdom of Spain (supported by Czech Republic, French Republic, Republic of Poland, Portuguese Republic, Republic of Finland) (C-189/11) was published last month. This case concerned the varying interpretations of articles 306–310 of the VAT Directive 2006/112/EC, the special scheme for travel agents, and primarily focused on the question of whether the tour operators’ margin scheme (TOMS) should be used to tax wholesale or only retail travel transactions where the supplier is acting as principal in selling travel arrangements.
What is the case about?
There has been a difference in approach to this principle by the Member States, leading to an uneven playing field, with some, including the UK and Germany, taking the view that wholesale transactions should be taxed under the normal VAT rules, whilst others took the view that the margin scheme should be used to tax both wholesale and retail transactions.
The case also considered the following subsidiary issues:
- whether it is possible for suppliers to provide business customers purchasing travel for own use, rather than resale, with a VAT invoice in some form to enable VAT recovery; and
- whether the margin scheme calculation can consolidate transactions or whether it must be done on a transaction by transaction basis.
What was decided?
On the main issue, the court decided that both wholesale and retail transactions should be subject to TOMS. The judge dismissed submissions regarding the relevance of the words ‘traveller’ and ‘customer’ in different language versions of the directive, making the logical point that, of all the parties in the supply chain for the sale of a travel package consisting of various elements, the wholesaler is the party dealing with the greatest number of constituent elements and VAT jurisdictions and rates. Therefore, the margin scheme, in blocking input tax recovery and requiring VAT to be paid only on the profit margin in the location the business is established, appears to offer the most pragmatic approach to the otherwise complex compliance burden a wholesaler would face.
In respect of the subsidiary issues that were considered, important points emerge. First, it should be feasible for businesses purchasing travel arrangements for in-house use to recover VAT. It remains to be seen how this will be achieved, but for UK businesses in this market it offers a quasi-return to the previous position where the supplier could opt out of TOMS and provide a tax invoice under the normal VAT rules.
Second, it was determined that the TOMS calculation should not be carried out across a long period, with transactions being consolidated to calculate the margin. The court decided that the legislation only envisages global calculations for specific sectors, e.g. second hand goods, and therefore it is necessary to do a margin scheme calculation for each transaction.
Was the decision a surprise?
The potentially wide-reaching impact of the decision for UK travel businesses will have come as a surprise to many. The decision itself appears logical in the main, although it remains to be seen how some of the subsidiary aspects will be implemented in practice.
What is the impact?
The key decision on the fact that wholesale transactions should be subject to TOMS will be far reaching in the UK.
If a wholesaler had registered for VAT in other locations in the EU, as a result of the normal VAT rules applying to his transactions as opposed to TOMS, the decision is good news from the perspective of the VAT compliance burden, although the significant changes needed to accounting systems could counterbalance this to an extent. If the business did not VAT register elsewhere due to the arbitrage (some Member States would not allow non-established wholesalers to VAT register on the basis they viewed wholesale transactions as being subject to TOMS, taxed in the place of establishment), the decision will create an additional bottom line cost.
By far the biggest impact would be if the decision brings to an end the effectiveness of the UK’s so-called ‘transport company’ arrangements, a unique VAT mitigation structure used by the majority of UK established retail tour operators to reduce the amount of VAT due on the sale of a travel package. This HMRC sanctioned structure (HMRC Information Sheet 02/96) allowed businesses to purchase the passenger transport element of this package through a separate but connected company. This company (a wholesaler) then marked up and sold on the passenger transport to the tour operator at the zero rate of VAT, meaning the tour operator’s margin, and thus the VAT due, was significantly reduced. This change will have a significant impact on the bottom line of many UK travel businesses.
Businesses will likely welcome any possibility of recovering VAT on travel arrangements they purchase, depending on how this element of the decision is implemented. The frustration will lie in the need to effectively move back to where we were a few years ago before the TOMS opt-out was removed.
With respect to how the TOMS calculation is done, for many businesses it will be extremely difficult to do a margin scheme calculation on a transaction by transaction basis, particularly for those where block bookings with transport providers and hotels are made.
HMRC’s reaction to this decision is keenly awaited.
This article appeared in Tax Journal on 11th October 2013.
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