U.K. Gov't Plans To Refund TMC Fee VAT Retroactively

Financial services companies operating in the United Kingdom could be reimbursed as much as $900,000 by the British government after paying too high a rate of value-added tax on their travel management company fees.

Her Majesty's Revenue & Customs, which is responsible for collecting VAT, has confirmed it intends to issue an interpretation of the issue before the end of October. Until now, lack of consistent guidance from HMRC has meant most travel management companies added a standard 17.5 percent VAT to their client fees. HMRC is expected to clarify that VAT should be applied to fees at the same rate as is applied to the service they are selling.

Since there is no value-added tax on public transportation, including air and rail tickets, the fees for booking them also will be zero-rated. The same is true for hotel and car rental reservations outside the European Union. However, hotel and car rental inside the EU are rated at 17.5 percent, so the fee for booking them will be assessed at 17.5 percent.

The new interpretation will be applied retroactively to previously paid fees, which is why some companies stand to receive substantial refunds.

Most business sectors in the United Kingdom are unaffected by the interpretation because they are VAT-registered. That means they are obliged to charge value-added tax for their products or services but also are entitled to reclaim all the VAT that they pay. However, certain sectors are VAT-exempt and therefore may not reclaim VAT. These include not only government bodies but also such financial services businesses as banks and insurance companies.

BTI UK, which led the lobbying for the change along with American Express and Carlson Wagonlit Travel, estimated the new interpretation will save its biggest financial services clients up to $180,000 per year. That could lead to maximum refunds of around $900,000 because it was roughly five years ago that airline commissions in the U.K. dwindled to the extent that clients started paying TMCs more in fees than they were receiving back in commission-based rebates.

Tony Pilcher, head of global business travel management for HSBC, expressed unfettered delight at news of the impending guidance. "This is a huge savings for us because we are not able to claim back most of our VAT," he said. "It will represent a significant reduction in the total cost of our TMC services."

In addition to establishing a principle of rating equivalence, the interpretation is expected to present a further bonus by allowing commission to be deducted from a fee before VAT is applied. If, for instance, a TMC charges a £30 (US$53) fee for a hotel booking in Frankfurt but is passing on a £10 commission rebate, then it will only apply VAT to the £20 net fee.

The imminent ruling will clear up long-running ambiguity about how value-added tax impacts travel management company fees. Most travel management companies applied a 17.5 percent rate but a few had been told that zero percent was acceptable. "The guidance will mean everyone plays by the same rules instead of following the interpretation of the local customs office," said Chris Gibson, tax director at BTI UK parent company Hogg Robinson.

Hogg Robinson has investigated whether similar changes would be possible elsewhere in the EU, where different member states have different VAT rates and rating principles.

In Germany, for instance, value-added tax is applied to domestic flights, though not to international ones, yet travel management companies are obliged to charge value-added tax on all their fees for air bookings. "The U.K. government has been receptive to working with business on this issue," said Gibson. "Other governments interpret value-added tax rules in different ways and it is often difficult to change their mindset."