At The VAT Consultancy, we recognise that the travel industry has a huge number of complex VAT rules to get to grips with, particularly given the majority of the transactions the business is dealing with are international so a knowledge of cross border VAT is essential. For businesses acting as travel agents (Online Travel Agents – OTAs, or Bricks and Mortar), there is a key VAT risk to manage, namely that of being able to demonstrate that the business is acting as a ‘disclosed agent’ rather than a ‘tour operator’ for VAT purposes. The challenge may even come even earlier than this, in the sense the business first needs to establish which of these ie agent or principal, it is, and the answer to this can differ for VAT purposes to the regulatory or commercial position.
This article aims to walk you through the key travel VAT considerations and issues faced by businesses in the travel sector acting as disclosed agents. For travel VAT advice relating to TOMS (the tour operator’s margin scheme), which is relevant to travel businesses acting as principals please see attached article: Read more about the impact of TOMS here.
The following captures the issues to be considered in determining which capacity the business is acting for VAT purposes and how this can be supported/evidenced:
Agent or Principal
this is the fundamental question a travel agent needs to answer to determine the correct VAT treatment to apply to its activities. The starting point is to firstly consider the capacity in which the business believes it is acting from a legal and risk perspective and to ensure that this is reflected in the relevant legal documentation. There are essentially two aspects to the legal documentation, being the contracts in place with the underlying providers of travel arrangements eg hotels, car hire companies, and also the traveller facing documentation which from a legal perspective will be in the form of the website terms and conditions that the traveller is asked to accept before finalising bookings.
these should clearly indicate the fact that the underlying travel provider is acting as the principal in providing the travel services to the traveller. This effectively means for VAT purposes that they are selling the travel arrangement in their own name to the traveller. The contract should also make it clear that the travel agent is simply acting as a disclosed agent in making arrangements for the contract and that the travel agent is not buying in the travel arrangements or on selling them in their own name
Website Terms and Conditions
the customer facing website will typically have terms and conditions which make it clear to the traveller that they will be legally contracting with the underlying provider of the travel arrangements rather than with the travel agent, come out with the travel agent simply making the relevant arrangements for the travel to take place in its capacity as disclosed agent
in addition to having a clear contractual position as set out above, it is vital that the business also issues supporting documentation ie invoices/booking confirmation documentation that supports this structure:
VAT that invoices must be issued to B2B customers and as this is a requirement under VAT legislation. The invoices should show the correct value of the commission earned by the travel agent. This is important to support the substance of the business being a disclosed agent, and it should show the value of the underlying supply that has been made by the travel provider to the traveller and also the value of the variable or fixed commission earned by the disclosed agent. This is important so that the underlying travel providers have visibility of the final selling price of the services they are providing directly to the traveller
With regard to the traveller themselves, it is not necessarily to provide a VAT invoice to the traveller and in many cases the business will not have revenues from the traveller. Instead a booking confirmation document will likely be emailed to the traveller or will be available to them via an online portal. This document should clearly show the identity of the underlying travel providers and also make it clear that the travel agent is acting in an agency capacity in line with the terms and conditions on the website.
Travel VAT Revenue Streams
Having determined that the business is acting as a disclosed agent, the next consideration for VAT purposes is one of whether the revenue stream is B2B or B2C.
If the business has B2B revenue this means it will typically be receiving a commission from the underlying provider of the travel arrangements eg the hotel or the car hire company for arranging the travel in question. This commission will either be fixed percentage of the value of the underlying travel being arranged or more commonly it will be a variable commission which allows the travel agent to fix the selling price to the final customer above the net rate provided by the travel provider. This amount is retained as commission. In terms of the VAT treatment of commission, this is referred to as intermediary revenue and follows the general VAT rule. This means that, for UK established travel agents, commissions from overseas travel providers will not be subject to UK VAT. Instead the overseas travel provider will self assess local via under the reverse charge mechanism where applicable and will fully recover this VAT where the underlying travel provider is in the UK, UK VAT should be charged although there is scope for the commission to be zero rated if the arrangements relate to travel that will take place outside of the UK.
Having B2B revenue as a travel agent is neutral from a VAT perspective as the VAT is charged to the underlying travel provider who can recover this VAT in full and therefore there is no sticking VAT cost. In addition there is no overseas VAT registration liability for the travel agent.
If the business has revenue from the traveller it has B2C revenue for VAT purposes and the VAT treatment of the fees is different to that set out above for revenues from businesses. If the travel agent charges service fees to the traveller for arranging the travel, the VAT treatment is driven by the location of the travel being arranged. If this is within the UK, UK VAT would be chargeable unless the travel is zero rated passenger transport (eg flights, trains). If the travel arrangements take place in the EU, the business would be required to register for VAT overseas and account for VAT at the local rate applying to the location of travel under the One Stop Shop (OSS) mechanism. This would be at the VAT rate applying to the arrangement being made, so either a reduced or standard rate is likely to apply. Fees relating to arranging travel taking place outside the UK/EU is not subject to UK/EU VAT. Technically there may be an overseas VAT registration requirement in the country in question, but in practice travel businesses do not VAT register in multiple countries worldwide outside the UK/EU. This is due to the fact that the VAT compliance burden and cost would be unmanageable given travel arrangements being sold typically take place in a significant number of countries worldwide.
Travel VAT – Other Revenue Streams
Travel agents frequently have other sources of revenue outside of the mainstream commission for arranging travel. The VAT treatment of this revenue can vary depending upon the nature of the services in question and care should be taken to ensure the correct treatment is applied, with travel VAT specialists being consulted for areas of uncertainty. Examples of such revenue include override commissions, marketing overrides, commission from financial services (eg foreign currency exchange, virtual credit card payments – VCCs and insurance commissions). It is important that the business has a good awareness of the impact of having such revenues where any of the revenue is exempt from VAT as opposed to zero rated as this means the business may need to restrict the amount of VAT it recovers on costs under partial exemption rules. VAT advice should be taken from VAT advisors if required.
The VAT treatment of these has changed significantly over the years and now in the majority of cases these are treated as revenue for the services that would have been provided they therefore carry the same VAT treatment. Where they are charged to the traveller for cancelling an overseas trip they would be regarded as additional revenue for travel agency services and therefore if the travel is overseas they can be VAT free in line with the VAT treatment outlined above.
Where charges are made to the traveller to amend bookings, these services are basic travel agency services and therefore also fall to be treated as intermediary services as set out above. If there is a variable Commission agreement in place with the underlying travel provider that allows all fees charged including these to the traveller to be treated as variable commission, these amendment fees would be B2B rather than B2C.
Travel VAT Risk Profile
Historically the largest risk faced by UK and EU established travel agents lay in the fact that the tax authorities would frequently challenge their status as agents as opposed to principals and would try to take the view that the tour operators margin scheme (TOMS VAT) applied to their activities, meaning a sticking VAT cost would arise. However the UK tax authorities have historically been largely unsuccessful during such VAT litigation and therefore the current position for OTAs and travel agents is as set out above. Since Brexit the VAT risk profile for UK based travel agents has reduced as TOMS VAT no longer applies other than on UK travel HMRC therefore are less interested in trying to prove that a business selling overseas travel is acting as a tour operator. This risk instead would likely come from an EU tax authority in the event they had visibility of the activities. However provided the business has appropriate infrastructure and substance to support the disclosed agency status, such a challenge should not arise.
As can be seen from the above there are many issues to consider in relation to travel VAT and The VAT Consultancy is well placed to assist, being a travel VAT specialist with over 20 years experience in providing travel VAT and TOMS VAT advice to businesses in the industry.
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Whether you’re a tour operator, travel agent, or a business providing related services, our team is dedicated to assisting you in navigating travel VAT.
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