ECJ TOMS decision will hit price of package holidays

A new ruling from the Court of Justice of the European Union (CJEU) on the application of the Tour Operations Margin Scheme (TOMS) covering VAT payments is set to have significant implications for the UK travel industry.

The ruling in the case [European Commission v Kingdom of Spain, Case C‑189/11] states that the eight EU member states who had originally challenged the scope of the scheme (Spain, France, Portugal, Italy, Greece, Poland, Finland and Czech Republic) are correct in treating wholesale supplies as falling within TOMS. The remaining EU member states, including the UK, tax wholesale supplies outside of TOMS.

Since European law requires the EU member states to have harmonised VAT systems, the UK will have to amend its legislation to start collecting UK VAT, under TOMS, from UK wholesalers selling travel services consumed in the EU.

BDO says its calculations suggest this is likely to have a 3% increase on the costs of UK tour operators and wholesalers.

Tom Kivlehan, partner and head of indirect tax at BDO, said: '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.'

As well as clarifying that both wholesale and retail supplies are subject to VAT under TOMS, the CJEU decision says that TOMS VAT must be 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.

David Bennett, travel VAT partner at Saffery Champness said: 'Under current UK law tour operators aggregate all the relevant sales into one calculation each year to identify suppliers, costs, margins and the VAT due. Now the European Commission is saying the requirement is to look at every TOM transaction individually, and work out the VAT on each individual sale. That has huge implications in terms of compliance and the systems required. It's not just the sheer volume but also the difficulty, given that margins change over time.'

Daniel Barlow, VAT partner at Deloitte, said another critical question was how much lead-in time the sector will be given to adjust pricing and systems, given that typically tour operators set prices and margins over an 18-month period. He said that the judgment could see wholesalers switching to making supplies from non-EU establishments.

'TOMS only applies to tour operators established within the EU. If the wholesale market does move to non-EU locations, this will probably be a trigger for the EU member states to reform the entire TOMS VAT system,' Barlow stated.

Bennett highlighted that the judgment potentially also raises specific issues for the use of the UK's transport company scheme which enables retail tour operators to ensure that the element of their margin attributable to passenger transport is taxed at the zero rate.

'That won't work any more because the transport subsidiary created for the purpose is itself a wholesaler. That would certainly make EU holidays more expensive and less competitive than destinations outside the EU. And the judgement as whole means we will see a lot of upheaval in contracts and accounting in this sector,' Bennett said.

The judgment is available HERE

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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