By Chris Photi, Head of Travel and Leisure at White Hart Associates
An important new announcement in Germany could lead to UK businesses being forced to pay Value Added Tax (VAT) when supplying travel services in Europe.
You may remember our blog from December, explaining that under a new UK version of the Tour Operators’ Margin Scheme (TOMS) implemented from January 1st, the margin made in EU destinations is now zero-rated (see https://www.whitehartassociates.com/blog/new-rules-on-toms-coming-soon/)
However, the German government has announced it does not consider that the EU TOMS rules apply to businesses outside the EU and that by extension non-EU businesses could be required to pay German VAT on services supplied in Germany (We are currently considering with German correspondents the technical analysis of the announcement). It would be effective from January 1st this year.
Out of all the EU member states, Germany was the most likely to do this as it already taxes river cruise companies and coach companies that pass through Germany, where the supply of cruise and coach is not from a German company.
The fear is that other countries may follow suit, requiring UK tour operators to register for VAT in some or all of the member states where they sell travel services. Although we are unaware of any other member state expressing a view on this, we think it is prudent when setting prices to factor in that VAT may be due on the supply of travel in EU countries.
Normal VAT in any member state is likely to mean the payment of VAT at the appropriate local rate on the selling price of the holiday and the recovery of the local input VAT charged by hotels, attractions etc.
VAT rates differ around each member states and some have preferential lower rates for tourism and hospitality.
What should you do now?
Firstly businesses must check that their EU suppliers are issuing qualifying VAT invoices to support the recovery of the input VAT should they be needed at a later date (although be aware some suppliers may not issue VAT invoices because, for example, they have to account for VAT under TOMS or are small and just not VAT-registered).
To quell any panic, it is important to point out that the German announcement is just the opinion of the local tax authorities – it is not based on a change in the law or on new case law. The announcement is also ambiguous as is the position under the EU VAT Directive, but we must be prepared for the possibility of the German authorities approaching UK businesses to seek registration in Germany.
While there is supposed to be a consistent EU wide approach, there is hope that other EU member states won’t follow suit because in practice most do not assess for VAT non-EU tour operators who are selling holidays in their countries at present (The UK will not and has not been the only non-EU tour operator sending travellers to the EU eg China, America, Japan etc.).
This may be because, in the member state’s view, the TOMS applies to all tour operators whether they are EU or non-EU (a view not shared by the EU Commission). It may also be a pragmatic decision, because pursuing overseas businesses for VAT is costly and could deter travel companies from selling holidays in that country. Member states may be prepared to forgo the VAT due on the sale of a holiday because the VAT charged by the local travel providers, like hotels, cannot be recovered as input tax and they collect tax on the revenue generated by tourists when they visit.
But this could all change and businesses need to monitor the situation closely.
White Hart Associates are specialist accountants for the travel industry. Visit www.whitehartassociates.com or contact 0208 878 8383 for more information.