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VAT on EU Travel Services – a temporary Brexit bonus?
The VAT treatment of travel services enjoyed in the EU has long been a complex area, even though the Tour Operators Margin Scheme (‘TOMS’) was meant to simplify matters for EU providers.
TOMS is an EU VAT scheme that enables providers of EU travel services to account for VAT in the country they are established, rather than having to register for VAT in multiple countries.
However, TOMS is renowned as being one of the most complicated simplification schemes, due to a number of complexities attached to it, from establishing whether a travel business is acting as agent or principal to whether the services are considered ‘margin scheme supplies’ (i.e. supplies that are covered by TOMS).
One of the key issues that continues to irk EU tax authorities is the treatment of non-EU providers under the TOMS scheme, as they appear to have a competitive advantage over EU providers.
This has been brought to a head with the UK’s exit from the EU, which placed thousands more travel service providers outside the EU. Although the UK has introduced its own TOMS scheme on leaving the EU, the UK scheme only applies VAT to services that are enjoyed within the UK.
Frustrated by the slow progress of EU TOMS reform, some EU tax authorities such as Germany and Croatia announced changes to their own domestic VAT rules to bring non-EU suppliers within the scope of VAT in their country, although the introduction of the proposed changes has been deferred, primarily because the EU wants a harmonised approach and wants any potential reforms to apply across all of the EU, once they have been worked up and agreed across the various EU members.
The EU Commission is now therefore prioritising a revamp of the EU TOMS rules, particularly how they apply to non-EU suppliers.
So why is this such a big issue?
EU TOMS and non-EU suppliers
EU TOMS rules arguably (see further below) apply to all businesses, whether or not the business is established in the EU, provided they supply ‘margin scheme supplies’ that are enjoyed within the EU.
However, this does not necessarily mean that EU VAT is payable on such supplies by non-EU businesses. A look at the legislation covering TOMS will show why:
The EU legislation governing TOMS is found in Council Directive 2006/112/EC (typically referred to as the EU VAT Directive), which states that services covered by TOMS “shall be regarded as a single service supplied by the travel agent to the traveller. The single service shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has carried out the supply of services.” It should be noted that any business supplying margin scheme supplies is typically considered to be a ‘travel agent’ for the purposes of EU TOMS legislation.
The most interesting part of the EU TOMS legislation in the context of non-EU suppliers is the part that states that “the single service shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has carried out the supply of services.” It thus appears that if the supplier provides margin scheme supplies that are enjoyed in the EU but is not established in the EU, the EU TOMS rules do apply, but VAT will not become payable under TOMS because the supplier has no EU establishment to pay VAT from.
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Because of the current uncertainty, we expect that revised rules will be introduced, perhaps as soon as 1 January 2023, to cover EU supplies made by non-EU suppliers.
There are a number of possible changes:
Perhaps the most likely change is for the EU to bring non-EU suppliers fully into the scope of EU VAT, and require non-EU businesses to register for VAT in an EU country of their choice to enable them to account for VAT on TOMS supplies made across the EU, similar to the One Stop Shop EU VAT registrations currently in place for suppliers of electronic services and for cross border retailers.
It is also possible that EU TOMS rules are changed so that they only apply to businesses established in the EU, meaning that non-EU businesses could not rely on TOMS rules and would have to apply the ‘normal’VAT rules that would apply if it were not for TOMS, as attempted by Germany and Croatia. This would mean that ‘margin scheme supplies’ enjoyed in the EU would be considered to be taxable where they were enjoyed if supplied by a non-EU business, so that non-EU businesses would have to VAT register in each EU country in which margin scheme supplies were made.
Another possibility is that TOMS is abolished entirely, so that the ‘normal’ VAT rules described above would apply whether the business was EU or non-EU, although I doubt that the EU would have the appetite to apply such a drastic change (with the consequent VAT compliance difficulties that would arise for all operators).
Changes are also likely to be made to how EU TOMS applies to B2B supplies of margin scheme supplies.
Whatever changes are to be implemented, they are now likely to come soon.
It is therefore essential that all UK providers of travel services, from full-service tour operators through to smaller operations organising tours or buying and reselling hotels of flights, understand how VAT applies now during this transitional period and also keep abreast of the changes that are afoot.
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