This article was written by Damon Wright, Head of Travel and Leisure, PWC for ABTA's seventh edition of Travel Law Today which can be downloaded here: abta.com/travellawtoday
When trying to apply VAT in the travel industry, where is a good place to start? Perhaps with the question – when is an agent not an agent? The answer, possibly, is when it’s a principal. No doubt you may be thinking – that doesn’t take me very far – so, perhaps I should explain further.
For a principal, where they either own the assets, eg, hotel owner, airline, car hire company etc., or will buy the service in from a supplier and resell it in their own name, accepting full liability to the customer, the VAT liability is determined by either; the normal VAT rules (place of supply, liability etc.); or, for the latter group where there is no material alteration and the sale is to the traveller (consumer or corporate traveller), the VAT Tour Operators Margin Scheme (TOMS).
However, for agents, the position can be more complex as the EU and UK VAT legislation can sometimes place the responsibility for any VAT accounting on to the agent, even where it is not buying in and reselling.
Where an agent acts in the name of a principal, it will account for VAT on its fees/commission (under the normal rules), whilst passing through the principal’s charges and VAT to the customer.
But, according to the VAT legislation:
This can be helpful. For instance, an overseas supplier who might otherwise have to register and account for VAT in the UK on services treated as supplied and taxed here (eg, the sale of admission to an event being held in the UK), can appoint a UK agent to stand in its place for the UK VAT accounting. The VAT liability will not change as a result of the agent acting for the principal, and the agent can issue UK VAT invoices to the customer, without contractually being liable for the delivery of the services themselves.
However, where the service being supplied is a ‘designated travel service’ under TOMS (passenger transport, accommodation, car/boat hire, tour guides, trips, excursions or airport lounge access), this may not be so helpful. In part, this comes from the EU TOMS legislation (Article 306 of EU VAT Directive 2006/112), which states: ‘Member States shall apply a special VAT scheme to travel agents who deal with customers in their own name…’
HMRC then sets out its policy in VAT Notice 709/5, Section 2.1 and 2.3, which states:
Therefore, according to the TOMS legislation, and HMRC’s interpretation, you can get to a position where a supply subject to normal VAT, when sold by the true principle, can then be taxed under TOMS when sold via an undisclosed agent.
Not surprisingly, this issue has been debated quite significantly in the (UK) courts where the approach (with some success for the taxpayers) has been to focus on the contractual arrangements between the parties to determine whether, as a question of fact, the taxpayer was a disclosed or undisclosed agent for VAT purposes.
In the meantime, while the above cases consider retail travel agents, what about Travel Management Companies (TMCs), meetings, incentives, conferencing and exhibitions (MICE) organisers and other businesses acting for corporate customers when arranging supplies of ‘designated travel services’, where the corporate customers may want to try to recover any VAT included in the cost (including overseas VAT)?
As noted above, if the TMC etc. acts as an undisclosed agent, it may be liable to account for VAT under TOMS and, when a TOMS supply is made to a business (for example, travel services used by its employees), the VAT invoice has to include a reference confirming that TOMS has been applied. However, it must not show a separate amount of TOMS VAT nor the VAT charged by the underlying principle, preventing the corporate customer from being able to reclaim any of the VAT.
Therefore, most TMCs etc. prefer to ensure that they act as a disclosed agent when arranging ‘designated travel services’ in order to give corporate clients the scope to reclaim the VAT. However, this still tends to raise commercial issues in being able to get the principal/supplier to provide a VAT invoice to the corporate client. In the UK, HMRC has facilitated this via what is called the ‘hotel bill back’ procedure but this is far from straightforward and does not solve the problem for travel services taking place outside the UK.