The following article was written by David Bennett, VAT Consultant, Elman Wall Bennet in Travel Law Today, 5th Edition which can be read here.
We must start with Brexit. VAT is a European tax and its implementation in all Member States is based on binding EU directives and regulations. Inevitably, therefore, leaving the EU means there is a lot of potential for change. Having said that, there is no reason to think the treatment of domestic transactions will change much in the short to medium term, but international transactions are a very different proposition and this, of course, is where we find travel. In March 2018, the UK and EU announced the terms of the proposed implementation phase to run until 31 December 2020 and it was agreed, conditionally, that the UK will continue to be bound by EU rules and regulations. This means EU VAT rules will continue to apply in the UK until the end of 2020.
However, on 1 January 2021 things may get interesting. I think it is unlikely that the way VAT applies to agency commissions will change very much but the requirement to submit the unpopular EC Sales Lists will presumably end. TOMS though is a different story. If the UK ceases to be bound by EU law, the EU TOMS regulation would have no application in the UK and it is easy to foresee a situation in which we simply do not have TOMS any more. Given its reputation for complexity, many may think that a good thing. But what would replace it? Moreover, how would the Treasury replace the lost revenue?
One possibility – but not a popular one – would be for UK tour operators to register and pay VAT in each Member State in which their holidays etc. are enjoyed. Clearly, this would be an onerous task for most but is no more than the application of basic VAT principles. Indeed, it is the very situation that TOMS was designed to ensure this would not be required. So, leaving the TOMS arrangements could expose tour operators to complexities, which have not existed for many decades since the TOMS rules were agreed. By the same token, the UK may require foreign tour operators to pay UK VAT when selling UK holidays.
Many would welcome avoiding the above scenario and ABTA has been discussing this with the Government. It was encouraging to note that the potential complications that leaving the EU VAT area could create were included in a report in April by the European Scrutiny Committee. This report also suggests that the Government’s long-term objective is “continued alignment with EU legislation beyond the transition to maintain the freest and most frictionless trade possible”. Furthermore, the Treasury Select Committee has invited submissions on the effects of Brexit on the UK VAT system. ABTA will be participating and will take this opportunity to reinforce the concerns we have made previously to the Government.
The meaning of agency
The distinction between agent and principal is hugely important for travel businesses in many respects. VAT is one such area. For example, TOMS cannot apply to a business acting as a disclosed agent. However, whether a business is an agent or not can be a very grey area. The situation has been clarified significantly, however, by the Secret Hotels 2 case (formerly known as Med Hotels) and five further disputes, which have followed. These decisions have helped to remove many of the grey areas but are very unpopular with HMRC. Despite losing all the cases, HMRC fights on and now wishes to see the matters involved referred to the European Court of Justice. It is expected that there will be a hearing to decide on the referral in late 2018. We may yet end up with a different position to that adopted by the UK courts.
The EU’s review of TOMS
The European Commission’s study on TOMS looked at the problems caused by differing implementations of the scheme and considered ways in which the rules might be modernised. We do not know yet how the Commission will respond but changes to the scheme throughout the EU are a possibility. Of course, we have to assume that the UK will not be a Member State by the time any new law in this area is agreed and so it is tempting to think we would be unaffected by such changes. However, that may not be the case. First, as described above, the UK may remain aligned with EU VAT law. Second, and more fundamentally, one of the key findings of the study is that equality of treatment of EU and third-country travel suppliers should be ensured. This could involve the payment of EU VAT by third country travel business in various scenarios, an important consideration given the UK’s future status as a third country.
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