A New Issue for Businesses in the Travel Trade

In last month's edition of tax.point, I described the background to the introduction of the Travel Agents' Margin Scheme (TAMS) and, in general terms, how it works. I pointed out that, in fact, the TAMS applies more to tour operators than it does to travel agents but there you go.

This month, I am going to focus on the questions of deductible VAT, the VAT distinction between EU and non-EU destinations, who accounts for VAT on commissions and when a foreign VAT registration needs to be considered. Also, Dolly and Trixie, our favourite hairdressers, have returned from Ibiza absolutely buzzing about the new VAT rules

Deductible VAT

For supplies coming within the scope of TAMS (essentially, this happens where somebody acts as a principal in the sale of a travel package), no deduction is allowed for the VAT incurred by the supplier on the acquisition of any element of the package, e.g. the hotel accommodation. This is so because the supplier is only taxed on the margin he receives, not on his full turnover.

However, a tour operator selling within the scope of TAMS is entitled to recover VAT on overhead expenditure, as is any other taxable business. Similarly, a travel agent (taxable on his commission income since 1 January 2010) can also fully recover VAT on overhead expenditure subject, of course, to the usual statutory restrictions.

EU v Non-EU Destinations

Where an operator sells a travel package to an EU destination and he is taxable under TAMS, the rate of VAT applying to his margin is 21%. The margin is deemed to include VAT at the standard rate. See examples in the first article on the subject in the February issue of tax.point. There is an argument which can be made that the rate of VAT could be 13.5%, but to date, Revenue have been unmoved by such irksome talk. However, where a similar package is sold to a traveller to a non-EU destination, the VAT rate applying to the operator's margin is 0%.

Travel agents and other intermedi-aries, though, do not enjoy the benefit of a similar disparity in VAT rates when they act in the arranging of a travel package. They do not come within the scope of TAMS as they are not acting as principals in such arrangements. So, irrespective of the destination (Rio or Curracloe) their commissions are subject to VAT at 21% where they are charged to Irish principals. Of course, the commissions are an overhead of the operator's business, so a deduction will be allowed to the operator for the VAT on the commission.

The place of supply of a travel agent's service is where the service is received and that is usually, although not always, where the tour operator is established. In the case of an Irish travel agent or intermediary earning commission from a UK tour operator for selling one of the operator's holiday packages to his customer, the intermediary's service is not subject to Irish VAT. Rather, the UK operator will self-account for UK VAT on the commission paid to the Irish intermediary.

Conversely, where an Irish operator pays commission to an overseas agent, the Irish operator will not incur foreign VAT, but will self-account for Irish VAT at 21% on the value of the commission paid.

A Word on B2B Transactions

A travel product sold by an operator to another person who will sell on the product (i.e. not a retail sale), does not fall to be taxed under TAMS. Instead, where for example, an Irish tour operator sells, as a principal, hotel accommodation in Ireland to a French tour operator who will sell on the accommodation to a third party the Irish tour operator will issue a VAT invoice to the French operator and the Irish operator will get a deduction for the VAT on the amount charged by the hotel. The Irish operator needs to hold a VAT invoice from the hotel to substantiate the claim.

Interestingly, if the French operator sells on the Irish hotel accommodation to another tour operator, the French seller is regarded as selling hotel accommodation in Ireland and would have an obligation to register and account for VAT here.

This raises an issue which, in some cases, poses a practical difficulty for operators. The place of supply, for VAT purposes, of hotel accommodation is where the hotel is located. What does this actually mean for, say, an Irish operator? To understand the issue, it may be helpful to consider two scenarios.

The first scenario is where the Irish operator sells to a traveller a return flight to a Spanish destination and a week's accommodation in a hotel there. From the operator's viewpoint, the flight and the accommodation are both “bought-in services” for the purposes of TAMS. This means that the place of supply is Ireland and the operator accounts for VAT included in his margin in line with the examples set out in my previous article. He has no further VAT obligations to consider.

Contrast that with the position where the Irish operator provides a similar Spanish holiday to a traveller except, in this case, the hotel accommodation is supplied as an “in-house” service. This could be the case where the operator either owns the hotel in question or has taken a guaranteed number of rooms at a given rate from the hotelier for, perhaps, a whole year. In this situation, the Irish operator is actually selling hotel accommodation in Spain and he is likely to be obliged to register for VAT in Spain in respect of such supplies.

The value of this accommodation has to be deducted from his margin calculation to ascertain his Irish VAT liability under TAMS.

A Final Word

The introduction of TAMS into Irish VAT legislation at the start of this year is the beginning of a new fiscal era for tour operators and travel agents. Whilst the additional record keeping and compliance is undoubtedly unwelcome, it was inevitable and it is a cloud with a real silver lining in that all of the input VAT incurred on overheads is now fully recoverable.

For Dolly and Trixie, life goes on back in the salon. The tans have started to fade but every now then their chat goes back to Ibiza and the wild things that happened there and the nagging feeling that, after all, they didn't really care whether their accommodation was a bought-in or an in-house service.

Dermot O'Brien is the Principal of Dermot O'Brien & Associates, a leading, independent VAT consultancy firm. Email: dermot@dermotobrien.biz