Partner Article

No cheaper holidays despite travel agents’ VAT reduction

If the Court of Justice of the European Union (CJEU) follows the advice of a senior European lawyer, UK travel agents could benefit from a VAT reduction of £156 million in operating costs. Holidaymakers are however unlikely to benefit from this windfall.

It is a long established principle in European VAT that tax authorities may not in any circumstances charge an amount exceeding the tax paid by the final consumer. Therefore, if a business offers a discount to its customer, the VAT liability should be based on that discounted price. Unless it would seem, the discount offered to the customer is funded from commissions rebated from a supplier further up the supply chain. This is common practice in the travel industry as it enables an agent price flexibility to win business when they have no influence on the brochure price.

In this scenario, where for example, the price paid by the traveller is reduced by a discount offered by the travel agent funded from the commission received by the travel agent from the tour operator, HMRC successfully argued before the UK tax tribunal that the travel agent must account for VAT on the full revenue received (ie. the fixed brochure price, which the agent cannot change, plus the commission received from the tour operator). Therefore, whilst the holiday maker benefits from the discounted price, the travel agent incurs a form of ‘double taxation’ because it is incurring VAT on the fixed holiday price plus the full non-discounted value of his commission.

In reviewing a similar VAT case to be heard before the CJEU, the Advocate General is of the opinion that the discount offered to the traveller must be offset by a reduction in the commission received from the tour operator. The travel agent’s ‘taxable amount’ should therefore be the discounted amounts actually paid by the traveller and received by the agent, even if the supply falls within the Tour Operators Margin Scheme.

As the supply is ultimately made by the tour operator to the end traveller, the traveller himself is unlikely to benefit from this legal analysis (he’s already had the benefit of the discounted brochure price). However, the travel agent’s operating costs would be reduced.

The CJEU doesn’t always agree with the advice it’s been given by its lawyers but, if it does, the wider implication of this case is that significant VAT refunds could be applicable to all agents (not just in the travel industry) where customers are given discounts that have been ultimately funded by and offset against commissions earned from the ultimate supplier.

This was posted in Bdaily's Members' News section by Baker Tilly .