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.
The article originally was published in Business Travel News