The following article by Deloitte's Tom Walsh originally appeared in ABTA's issue of Travel Law Today - Spring 2022.
Since its withdrawal from the European Union (EU) on 31 December 2020, the UK has implemented changes to the Tour Operators Margin Scheme (TOMS). These changes have taken effect during a time when the ability of non-EU established entities to apply TOMS in some EU Member States has begun to curtail, with further action expected from the European Commission. The impact for UK members using TOMS is that the UK margin scheme may no longer be relied upon to account for all VAT due on the sale of EU products.
What is TOMS?
TOMS was introduced by the EU in 1977 as a way for businesses to simplify VAT accounting on the onward supply of bought-in travel services.
A primary objective of TOMS was to reduce the complexity of VAT accounting for tour operators by allowing onward supply to be taxed in the tour operator’s place of establishment, thereby removing the obligation for businesses to register for VAT in every EU destination where packages are supplied. The EU TOMS simplification derives from European VAT law and has been implemented in each EU Member State (including the UK up until 2021) through local legislation.
Under TOMS, a business is required to account for VAT on designated margin scheme supplies in the country it is established, even if the services are provided elsewhere (eg a French-established business selling holidays in Spain would account for VAT in France, rather than Spain). Travel businesses without any presence in the EU have historically applied the same principle, meaning that supplies made under TOMS fall outside the scope of EU VAT when supplied by a non-EU tour operator.
Following the UK’s secession from the EU, the concept of TOMS remains under UK VAT law but with changes so that UK tour operators no longer account for UK VAT at a positive rate when selling EU products.
In recent years, the application of TOMS across the EU has been considered by the European Commission and debated at various VAT working groups but without any legislative changes to its operation.
In February 2020, the European Commission launched a formal evaluation of how TOMS is applied across the EU. The findings were published a year later and highlighted a number of key issues for the Commission, including that ‘the current application of the TOMS does not ensure a level playing field for all travel agents operating within the EU market, including those not established within the EU’.1
While the EU Commission has separately identified the taxation of non-EU established tour operators as an issue, some individual EU Member States have proactively announced or implemented changes to their local application of TOMS ahead of any potential changes to EU VAT law.
Croatia and Germany have already taken steps to restrict non-EU established businesses from applying TOMS.
Against the backdrop of ongoing activity at European Commission level, both Croatia and Germany have taken unilateral action to change the way in which TOMS can apply to non-EU established tour operators.
In January 2021, the German Ministry of Finance announced that it would be changing its interpretation of existing TOMS legislation such that non-EU established businesses can no longer rely upon TOMS for supplies made in Germany. Although announced in January 2021, the implementation has been delayed and is now scheduled to take effect from 1 January 2023.
Also in January 2021, Croatia changed its approach to the taxation of non-EU established businesses. Unlike Germany, however, the change in Croatia was effected quickly and provides insight into how the removal of access to the TOMS rules in the EU could impact non-EU established businesses.
Since January 2021, UK travel businesses have been required to register and account for VAT in Croatia in respect of supplies made in Croatia (ie account for Croatian output tax and recover local input tax on individual supplies made or received via a local VAT registration, rather than applying a margin scheme calculation).
If the ability to rely on TOMS is removed across the EU, UK tour operators would be required to undertake the same process in every EU Member State where bought-in travel products are sold in the tour operator’s own name.
In addition to the changes in Croatia and Germany, there have been two recent cases in the Spanish court system that have ruled in favour of TOMS not being applicable for non-EU established businesses.
After a number of years of discussion and debate, it is clear that changes to the application of TOMS are afoot and Member States are exploring (and implementing) options to address the perceived unlevel playing field between EU and non-EU operators, while awaiting any broader legislative changes that will invariably take time when routed through the EU Institutions.
The European Commission is due to undertake a study on the future of TOMS later in the year and is expected to propose changes to the European VAT Directive in 2023, which could set out changes to the scope and mechanisms of TOMS.
Although any EU legislative changes will take time to implement, recent developments in Croatia and Germany point to a problematic trend for ABTA Members. Should more EU Member States take unilateral action to impose local VAT on supplies made by UK-established operators it would serve to increase the cost and uncertainty of selling EU travel products. Our view is that there is a greater need than ever for UK travel businesses to keep abreast of EU VAT law developments and the local tax rules applicable in destination territories.
Tom Walsh, Deloitte LLP UK – Partner
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