A referral of eight member states to the European Court of
Justice by the European Commission last week for alleged misapplication of
value-added tax to travel has potentially important implications for travel
management companies and meetings organizers, experts told BTN. The decision to
make the referral is implicit acknowledgement that attempts to reform the
contentious Tour Operators’ Margin Scheme, which causes significant
bureaucratic problems for intermediaries, are dead, the experts said.
Furthermore, the ECJ’s deliberations, though concerning a travel wholesaling
issue more immediately related to leisure travel, could lead to changes in VAT
treatment for all business-to-business travel transactions, including corporate
travel.
After eight years of preparatory work, European Union member
states in 2010 looked in depth at reforming TOMS. The scheme excludes travel
intermediaries from normal VAT rules, other than on their profit margin.
Although this is very helpful for tour operators selling package holidays, it
also applies to such intermediaries as travel management companies, who cannot
always recover VAT on their costs and must pass them on to clients in a way
that they cannot recover costs either. In practice, this does not often happen,
thanks to a series of elaborate but often flawed and noncompliant invoicing
workarounds.
Travel industry campaigners had hoped to sweep the whole
issue away with reform that would allow intermediaries to opt out of TOMS
completely. This would have enabled TMCs and event organizers to charge VAT and
business clients to recover it in the normal way. The European Travel Agents
and Tour Operators Association (ECTAA) and Guild of European Business Travel
Agents argue TOMS puts intermediaries at an unfair disadvantage with hotels and
other suppliers. “Member states did not agree to allow travel agents to use the
normal VAT arrangements,” said ECTAA manager Christina Russe. “Yet this is
necessary if travel agents are to compete effectively with travel service
suppliers, such as hotels, whose clients can benefit from input VAT deduction
or reduced VAT rate/exemption under the normal VAT arrangements.”
However, David Bennett, a VAT specialist with London-based
accountancy firm Saffery Champness, said the TOMS review was abandoned at the
beginning of January.
“It is very unlikely there will ever be agreement,” Bennett
said. “The member states are miles apart on what should be done. This is an
opportunity missed.”
Bennett added that the failure to reform TOMS “is why the
European Commission has gone ahead with infraction proceedings against eight
member states. The current TOMS scheme is applied differently throughout the
EU. The directive is ambiguous, so different member states have adopted
different local rules.” The Commission alleges that eight countries, including
Finland, France, Italy and Spain, are mistakenly applying TOMS to wholesale
supply of services from one travel company to another.
Bennett thinks a judgment is unlikely for at least 18
months, but all travel intermediaries will have to watch out for it. “If the
member states lose, then in theory a much greater level of compliance will be
required,” he said. “Any form of B-to-B travel transaction could be affected.”
ECTAA believes one possible outcome of the ECJ ruling could
be what Bennett described to BTN in 2009 as “an administrative nightmare” where
VAT is applied in the country where the supply takes place, not where the customer
is based. In effect, this would lead to a TMC having to register and account
for VAT in every EU country with a hotel that has been booked by its agents.