Case: VAT and wholesale travel

The ECJ ruling in the Spanish case means wholesale travel companies have to review their VAT payments, says David Bennett

The recent decision of the European Court of Justice (ECJ) in the case European Commission v Kingdom of Spain (case C-189/11), released in October, was not a one-off event.

The ECJ ruling in the Spanish case means wholesale travel companies have to review their VAT payments, says David Bennett

The recent decision of the European Court of Justice (ECJ) in the case European Commission v Kingdom of Spain (case C-189/11), released in October, was not a one-off event.

The case against Spain was in fact just one of eight cases taken against member states on the application of the special scheme for travel agents (Articles 306-310, Principal VAT Directive), better known in the UK as the Tour Operators' Margin Scheme (TOMS). The other seven cases were brought against France, Portugal, Italy, Greece, Finland, Poland and the Czech Republic.

The purpose of this article is to explore the meaning and implications of those decisions. Even though the UK was not involved, the decisions nevertheless have far-reaching implications in this country.

The cases considered various aspects of the member states' interpretation of the TOMS rules. There are three decisions in particular which affect the position in the UK:

  • the treatment of 'wholesale' supplies, ie, supplies made to another business for resale. Such supplies do not fall within TOMS in the UK but the ECJ has decided that they should do;

  • the method of calculation. The UK approach is a single year end calculation including all TOMS transactions and related costs for the year. The ECJ said that VAT must be calculated separately on each service; and

  • the invoicing of TOMS supplies. UK guidance says that a VAT invoice cannot be issued for TOMS supplies but the decision has implied that a VAT invoice is required.

Any one of these has the potential to introduce significant change but once taken in combination it is clear that the effect could be dramatic.

I will consider each of the three below but a few words first on how we got to this situation might be helpful. The story goes back to the 1990s. By then it was clear that TOMS (agreed in the mid-1970s) was outdated: the European Commission was receiving complaints from member states and taxpayers alike that the rules were applied inconsistently and that competition distortions were commonplace. The Commission put forward proposals for a new scheme in 2002 but, despite two concerted periods of negotiation, no agreement has been reached. The scheme is therefore essentially the very same agreed nearly 40 years ago. Business practices have changed somewhat since then!

The cases sprang out of the reform process and reflect the Commission's responsibility to promote harmonisation.

Wholesale travel

One area of great contention has been the treatment of wholesale travel. Confusion has reigned because the directive is just not precise enough and because different language versions vary. Some versions suggest the scheme should be used for supplies made to 'travellers' while other versions use 'customer'. The Commission's argument was that 'traveller' is correct and that the client of a wholesale supplier is not a 'traveller'. Furthermore, it argued that deviations from the normal VAT rules (such as TOMS) should be applied restrictively.

The ECJ looked at the purposes of the scheme. These were agreed to be simplification and a fair allocation of revenue to member states. The best way to achieve both objectives is the inclusion of wholesale supplies in TOMS.

Accordingly, we now have to accept that the approach in the UK (and indeed in the majority of member states) is wrong. Wholesale suppliers are therefore faced with considerable change which for most will mean an increase in VAT payable. Wholesalers will inevitably find it harder to compete with wholesalers established outside the EU (who it is widely accepted are not subject to TOMS VAT). We may see a migration of these companies to a more favourable location. Furthermore, the cost of UK tourism will increase; the UK will become a less attractive destination.

The Transport Company Mitigation Scheme, agreed by the Association of British Travel Agents (ABTA) and HMRC nearly 20 years ago, is widely used by the travel industry but depends on the exclusion of wholesale supplies from TOMS. There is also, therefore, a question mark over its continued availability.

These are serious concerns. Fortunately, in previous discussions, both HMRC and the Treasury have proved to be sympathetic. A similar attitude is required again.

TOMS calculation

UK law requires those in TOMS to do a single year end calculation to work out the VAT due on all sales in the year. This approach is also now in jeopardy. The ECJ disapproved of Spain's approach which allows taxpayers to calculate the VAT due over a period (referred to in the judgment as the 'global basis'). Instead, the court's interpretation is that the VAT must be calculated on each individual transaction.

The court did not consider the practical difficulties this will create. There is a very good reason that the UK (and indeed nearly all other member states) adopt a global basis. How, for example, do you treat year end volume rebates (a reduction to the TOMS cost base) earned in relation to a large number of holidays sold? Or a block booking of accommodation only used partly to make TOMS supplies?


HMRC guidance is very clear: a VAT invoice cannot be issued for a TOMS supply although, as discussed in my article (Accountancy, November 2013, p37) it is now accepted that such an invoice should be issued for an in-house supply made with TOMS supplies.

Even this is now in doubt. The court said that a business purchaser has a right to recover the VAT due on the margin. It presumably follows that the supplier must invoice for the margin VAT. Indeed, the Advocate General, Eleanor Sharpston QC, stated in her opinion that a VAT invoice might be a requirement. A VAT invoice for the margin would, of course, involve the disclosure of the margin to the client, a commercially sensitive issue.

The reaction of HMRC will be of great importance. It is clear, though, that the decisions may affect the VAT position of many to a substantial degree. They may also give fresh impetus to the European Commission's reform programme.

It is deeply ironic that the ECJ decided the first point on the grounds of simplicity but then on points two and three added very considerably to the complexity faced by those in TOMS.

David Bennett is VAT partner at Saffery Champness and a member of the regulation committee of Eventia

David Bennett |Partner and VAT specialist, Saffery Champness

David Bennett is a VAT specialist at Saffery Champness focusing on the travel industry. He acts for tour operaters, travel agents an...

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