EU ruling denies travel agents VAT refund on discounts

In a new ruling the Court of Justice of the European Union (CJEU) has confirmed that travel agents cannot reduce the amount of VAT they pay when they grant customers discounts on the price of holidays.

The CJEU gave judgement last week in the case concerning German travel agent Ibero, which had argued that it should receive a VAT refund when discounting a tour operator's holiday.

The matter was originally referred by the German courts to the CJEU last year, when the Court's Advocate General found in favour of Ibero, agreeing that travel agents should reduce the amount of VAT they pay when they fund discounts to the price of holidays. However, the CJEU's decision on 16 January 2014 has confirmed the opposite.

The CJEU has now decided that there is no basis on which a travel agent (acting as intermediary) can benefit from a VAT reduction when, on its own initiative and at its own expense, it grants a discount to the holidaymaker which means the agent forgoes an element of the commission it receives from the tour operator. The travel agent is therefore not entitled to a refund of the VAT due on the portion of unclaimed commission.

Ibero's claim was based on principles established in a 1996 case, Elida Gibbs (Elida Gibbs Ltd v C and E Commissioners (Commrs), Case C-317/94 (1996) STC 1387), where the court agreed that VAT on goods was due only on the actual amount paid by the end consumer. Therefore, manufacturers that provide consumer refunds via vouchers or cashbacks could reclaim the VAT on the value of these, even though the consumer may have bought the goods from a completely separate retailer.

The CJEU rejected this argument, concluding that the discount given by the agent cannot change the value of the sale - either from the tour operator to the consumer or the travel agent to the tour operator. This is because the tour operator would still receive the same net balance plus a VAT invoice for the full (pre-discount) commission, and would recover the VAT on this. Therefore, there is no basis on which either party can reclaim any VAT in respect of the discount.

Simon Prinn, an indirect tax partner at Deloitte, said: 'Many UK travel agents have submitted claims for overpaid VAT. While the Ibero Tours case concerns a German taxpayer, the UK is obliged to implement judgments of the European Court. I am sure that HMRC will read the decision and communicate their position regarding UK travel agents in the near future.'

The lead case in the UK for this issue is the Tui Travel plc appeal which, after its claim was rejected by the first-tier tribunal last year, is awaiting a hearing date at the upper-tier tribunal.

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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