VAT'll be the day

Catherine Chetwynd explores complex developments in EU tax law

From January 1 this year, the EU removed exemption from the Tour Operators' Margin Scheme (TOMS). The former opt-out allowed companies and events agencies to reclaim VAT on many of their meetings costs and cancellation of this means any UK organisation using an events or business travel agency may see bills increase by as much as 17.5 per cent.

The use of the words 'agent', 'disclosed' or 'undisclosed', and 'principal' in TOMS are important. For the purposes of this article, the words 'agent' and 'agency' will be used to describe any company that provides a middle-man or conduit service between buyer and supplier. A principal is the buyer that pays the bill.

As the name suggests, TOMS was originally designed for the leisure market, to cater for the multi-national nature of the services provided by tour operators. "VAT is a tax on consumption and is therefore due on most services, where consumed," says VAT specialist and partner at chartered accountant Saffery Champness David Bennett. "Without TOMS, VAT would be due in the member state where the holiday takes place, which means a holiday company might be obliged to be VAT registered in all 27 EU states.

"TOMS avoids the problem by taxing the tour operator on its margin and taxing the seller (a hotel for example) in the member state where the seller is conducting business," he says.

Where the customer is a private individual, this works smoothly. However, difficulties arise in a business-to-business environment such as meetings and events. Until January 1, 2010, businesses could opt out of TOMS, so any agency supplying, or company consuming, the travel components of the events industry - commonly passenger transport and accommodation - was generally able to reclaim VAT on those items.

Hotel billbacks

The area in which the application of TOMS is most easily understood is hotel billbacks.

"In the old days, an agent could have had a hotel bill sent to them in their [the agent's] name and they would consolidate invoices and bill the customer with one invoice for all accommodation," says group managing director of BSI, Trevor Elswood.

Now, if the invoices are in the name of the agent, the agent is seen to be acting in its own name and is an 'undisclosed agent'. In these circumstances, TOMS applies and VAT cannot be recovered.

To give an indication of the scale of the problem, a business agency (events organiser or TMC, for example) buys a hotel room at £100 plus VAT, the hotel raises an invoice to the agency for £117.50 and the agency marks it up by £10.

If this transaction were still exempt from TOMS, the agent would recover £17.50 on the hotel cost, reducing it to £100 and would add £10, making the charge to the customer (principal) £110 plus VAT. The customer would then reclaim the VAT.

However, with TOMS, there is no recovering VAT on travel, so the cost to the agent is £117.50 and the agent needs to add £10, so the buyer receives a bill for £127.50, on which he cannot reclaim VAT. "So in one fell swoop, the client's bill has risen from £110 to £127.50," says Bennett. This is an increase of 15.9 per cent. It gets worse. "The agent's £10 mark-up is also subject to VAT, so the agency pays £1.50 and is left with £8.50." TOMS even applies where there is no mark up.

However, if a hotel addresses invoices to the buyer (principal) in the name of the individual and the company but at the agent's address, i.e. c/o the agent, and the agent is a 'disclosed agent' and defined as an agent by contract, TOMS does not apply and the buyer can reclaim VAT.

"The contract is between the hotel and the client and the agent is just in the middle facilitating it," says head of marketing and business intelligence for Hotelzon Juliet Price. "We are no longer able to invoice clients for stays at hotels, we provide a remittance advice which advises them of the outstanding amount. By doing it this way, there is no VAT liability for us because the client, the end user, is able to fully reclaim VAT."

"We think we have reached an agreement with HM Revenue and Customs (HMRC) to allow this," says Bennett, who has joined HBAA in talks with HMRC, the outcome of which was to be announced after Buying Business Travel went to press.

Events organisation

Events organisers will also be looking to set up master services agreements, so that it is clear they are acting as an agent and do not have legal liability for the event. "If you have legal liability it suggests you are a principal, not an agent," says Bennett.

"An agency uses three, four, five, or more services to put an event together - transport, hotels, taxis and so on - but it is contracting on behalf of the client and the services are being sold directly to the client, so it follows that legal responsibility for the provision of the service cannot be the agent's. Any redress the client has is directly to the supplier - the hotel and so forth.

"The only aspect the organiser (or agent) meets is liability for its possible negligence," he says. "Where the agent is not contracting, it is not selling an event, it is selling the service of organising an event. That is still 'VAT-able' somewhere and is usually treated as UK VAT on a management fee, not as VAT on the cost of the event," says Bennett.

Finance director of performance improvement company Grass Roots, Graham Corfield, sums up the changes: "The immediate impact... is an increase in non-recoverable VAT costs for our clients... If contracting does revert to the client, this will mean a lot more of our time will be spent dealing with both our clients' and suppliers' legal terms."

In addition, if agents' turnover drops to reflect commissions and fees only, this may create a perception problem among corporate clients and potential clients.

More to come

From January 1, 2011, VAT will be due where the client is located, rather than where the travel is consumed, so an event that is organised for a UK client will attract UK VAT, regardless of where that event takes place. This would simplify the rules considerably. All these changes, including rendering illegal the opt-out of TOMS, are part of the European Commission's desire to change the TOMS rules to enforce consistency. To this end, it is taking legal action against nine member states.

In addition, the Spanish presidency of the EU has confirmed that it plans to reopen negotiations on a new TOMS during its incumbency in the first half of this year. This has the potential to radically change the way VAT is applied to events - not necessarily to the detriment of organisers and their clients: one option would be to dis-apply TOMS automatically when the customer is a business. However, Bennett believes it may be 2012 before there is any further change. In the meantime, he says the task is: "to prove to the EC that TOMS should not apply to business-to-business supplies in the first place."