VAT - How will tour operators be affected by Brexit?
Tour operators use an EU wide scheme known as the Tour Operators’ Margin Scheme or TOMS for short, in order to calculate how much VAT is payable on the holidays they sell. They have to calculate the margin, i.e. the difference between the selling price and the total of all the VAT inclusive costs of the holiday. VAT is then payable on the margin at 0% if the holiday is outside the EU and 20% if the holiday is within the EU.
Without TOMS, the place of supply for hotel accommodation is where the hotel is situated and for passenger transport it is where the transport actually takes place. Therefore tour operators would have to register for VAT in every EU member state where they organise holidays. TOMS is a valuable simplification measure even though it is widely hated in the travel industry because of its complexity.
Post Brexit, there are a number of possible ways of calculating VAT on holidays and which of these will apply will be thrashed out in the next couple of years during the negotiations with the EU. If the end result is a ‘soft’ Brexit then VAT union with the EU might enable us to keep TOMS. Alternatively a ‘hard’ Brexit with no VAT union with the EU will mean changes to EU VAT rules will be very likely. With no access to TOMS via the UK, tour operators will either need a VAT registration somewhere in the EU which will mean they can carry on using TOMS or face having to register and account for VAT in every member state where travel services are supplied. This is not something to be welcomed – imagine having to keep up to date with the VAT rules in up to 27 member states.
Added to the ongoing Brexit discussions, the European Commission itself is currently pushing for changes to TOMS. In recent years infraction proceedings were taken against a number of member states including Spain in relation to their implementation of the TOMS rules. The Court of Justice of the European Union ruled in favour of the Commission. The UK, although not included in the infraction proceedings, was also guilty of similar implementation errors but HMRC decided not to require UK businesses to change how TOMS is calculated.
Last year the European Commission invited tenders for a study into the future VAT treatment of travel which includes an analysis of how each of the member states applies TOMS and an assessment of possible reform options. A contractor has been appointed and has begun work on the study.
Therefore with or without the UK in the EU, changes to TOMS are on their way. UK tour operators need to keep a close watch on how this area develops and push for plenty of warning before having to implement changes because of course the travel industry sets its prices some way in advance and needs to know about changes to costs in order to build them into prices. Setting up overseas VAT registrations and learning local rules takes time too.
Advice for travel businesses is to keep up to date, be flexible and be ready to restructure. Easier said than done!
If you would like any further information on how brexit might affect your business please get in touch.