By Daniel Hunter
Led by the case involving Spain, the European Court (CJEU) has ruled on the application of the VAT Tour Operations Margin Scheme (TOMS) which is widely used throughout the UK and European travel industries.
BDO LLP, the accountants and business advisors, have calculated that this is likely to have a 3% increase on the costs of UK tour operators and wholesalers.
The decision from the CJEU has stated that both wholesale and retail supplies are subject to VAT under TOMS and that TOMS VAT must be calculated on each transaction and not on the gross margin over an extended period and over multiple transactions — a major change to current industry practice.
“Given that traditional UK tour operators and other businesses, such as wholesalers, operate on very narrow net margins of 1% to 2%, any increase in cost is likely to have a fundamental impact on their business," Tom Kivlehan, Partner and Head of Indirect Tax at BDO LLP commented.
"Today’s ruling by the European Court will have a major impact on the UK travel industry and companies will need consider whether they can pass on the additional costs to customers, which can be extremely difficult to do in such a highly competitive market.”
Given that the CJEU is the highest authority for the application of VAT across the EU, the UK is obliged to amend its VAT legislation to comply with these interpretations. The implications for the UK travel industry will be significant. In more detail:
- the Transport Company Option may no longer be effective, as UK transport companies could have to pay 20% UK VAT on the margin of all EU transport
- UK companies applying TOMS would not be able to offset losses on some sales against profits on others;
- UK companies applying TOMS with mixed EU and non-EU supplies would no longer gains a benefit of offsetting reduced margins on non-EU sales against margins on the EU ones;
- UK based wholesale suppliers (accommodation brokers, ATOL to ATOL flight providers etc) may now have to account for 20% UK VAT on the margin for all EU products.
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