EU: Travel agents can apply TOMS to all their travel sales

The special VAT regime (taxation of the margin) that applies to travel agents and to tour operators (incl. of on-line travel agencies) – the TOMS – has just recently been commented on in detail in eight judgments handed down by the Court of Justice of the European Union. The eight decisions all relate to the issue of whether the special VAT regime must only apply in a transaction between a travel agent and a “traveler” or whether the regime must apply to any transaction falling within the scope of that scheme between a travel agent and any client. One of the decisions involving Spain also dealt with a few separate issues – mostly specific to Spain – apart from the calculation of the margin itself.

The cases brought before the Court were the result of infraction proceedings initiated by the Commission under article 258 of the TFEU and in its decisions the Court reminded the Commission that the objectives of the special VAT scheme were twofold:

  1. Firstly, that the special scheme should ensure a correct sharing of the total tax (VAT) revenues between the place where the travel agent is established and that where the underlying supply of eg. accommodation or transport, is made; and
  2. Secondly, that the special regime is a simplification measure designed to avoid travel agents having to register for VAT in every EU state where the underlying supplies take place.

The Court had to examine, therefore, which of the approaches being put forward, either that the supplies within the special scheme only applied to supplies to travelers or applied to supplies to any customer (client), met the underlying objectives of the EU VAT Directive.

In the Court’s view, the approach based on the customer (client) is the better one able to achieve both goals, i.e. by allowing travel agencies to benefit from the simplified rules (TOMS) regardless of the type of customer to whom they provide their services.

In the Spanish decision Case C-189/11, an additional point was raised, which is that a global TOMS calculation is not permissible – VAT must be calculated on a transaction by transaction basis. This will be a major issue for businesses operating in those Member states which currently require a global calculation and do not permit any other method. Quite apart from the great administrative difficulty (if not impossibility in some cases) for tour operators/travel agents to work out the costs of an individual holiday/supply – it means that losses (eg unsold capacity or on discounted holidays) cannot be offset against profits. Therefore, tour operators in those countries can expect their VAT costs to increase as those Member states will be required to change their TOMS calculations.

According to the Court therefore, Articles 306 to 310 of the VAT Directive should be read following the approach based on the customer or the client, i.e. that the travel agent should be entitled to apply the TOMS regime regardless of the status of the client and that the travel agent should not be required to investigate whether the client is the traveler or will on-sell the travel service or not. Therefore, travel agencies can apply the special VAT regime for travel agencies (TOMS) to travel services sold to other travel agencies as well as to the actual traveler.

These decisions will clearly have an impact on businesses in those member states which do not currently apply the TOMS to any supply in a chain of supplies, but limit the application of the regime to the supply to the actual traveler.

This decision will also need to be carefully examined by the Commission as part of its longer term proposals to reform the existing VAT special scheme.

There is clearly a lot of movement in a sector which is already under pressure on its margins and these decisions will certainly not alleviate that situation.

For more information and for the judgment case references, see the Court’s press release.

Please contact Sophie Claessens for more details.

About Sophie Claessens

Senior Tax Manager PricewaterhouseCoopers Tax Consultants Belgium email: Mobile: +32 473 91 05 67 Office: +32 3 259 3169

Sophie Claessens is an international VAT advisor, based in Antwerp, Belgium, with a particular focus on business-to-consumer industries, including telecommunications, media, internet and e-commerce. She supports major industry players on sector-specific issues, including VAT compliance at both an operations and strategic level, and is directly involved in policy work for businesses in these industries, both at the Belgian level and at the level of the European Commission. She is responsible for indirect taxes in the communications sector at PwC Belgium and is a driver of PwC's Business Working Group on the EU 2015 VAT changes. She has authored articles for publication in Belgian and international tax journals.