Travel agents feel they have been let down again as Member States fail –for the second time- to reach agreement on the much awaited revision of the special scheme for travel agents. 10 years have elapsed since the Commission presented a proposal to overhaul the travel agents’ VAT scheme. Now the Commission has decided to take things back into their hands and referred 8 Member States to the European Court of Justice for incorrect application of the VAT scheme for travel agents.
It will now be up to the European Court of Justice to decide the way in which the special margin taxation scheme for travel agents has to be applied. However, the decision of the Court will be based on a legislation that dates from 1977 and which does not take account of the technological evolution and changes in the travel supply chain.
The industry would have preferred if the Member States had reached agreement on a proposal of the European Commission to revise the travel agents’ VAT scheme. ECTAA and GEBTA have strongly supported the Commission’s proposal presented in 2002, which aimed at simplification, modernisation and a more uniform application of the Community provisions. One of the core elements of the proposal was an opt-out provision for supplies to taxable persons where the services are used for business purposes. This is essential if travel agents are to compete effectively with direct sales of travel service suppliers, whose clients can deduct input VAT under the normal VAT arrangements and benefit from reduced VAT rating or VAT exemption. Such an opt-out also exists in the margin scheme for second-hand goods. Regretfully, Member States do not seem to share this view and prefer to extend the scope to all supplies of travel agents.
Said President of ECTAA, Ms. Irena GUEORGUIEVA: “Time is up. Member States have to seize this last opportunity to thoroughly revise the margin taxation scheme. But we must ensure that we do not replace the old scheme with a new one, which would perpetuate the distortions of competition that are inherent in the current arrangements.”
Background to the margin taxation scheme:
The special scheme for travel agents has been introduced as a trade facilitation measure. Its objective is to prevent the complications that the application of the normal VAT rules would cause travel agents where they sell services supplied outside the Member State concerned. Under the normal VAT rules, travel agents would have to pay VAT on every supply of services made to him and register in each Member State from which he purchased services. But under the special 'margin' scheme all transactions performed by the travel agent in respect of a journey are treated as a single supply of services for VAT purposes, taxable in his own Member State. He has no right to deduct VAT on supplies made to him, but on the other hand he is only taxed on the profit margin realised on the supply of the travel package.
The special scheme also has the advantage that VAT revenues are allocated to the Member State where the final consumption of each individual service takes place, i.e. VAT on the travel agent’s supply goes to the Member State where the travel agent is established and where the profit is generated, while the VAT on the hotel accommodation is allocated to the Member State where the service is rendered.
The European Commission has presented end of 2002 a proposal to revise the special scheme for travel agents, the objective of which was to modernize the special scheme and to ensure a more uniform application of the special scheme across the EU Member States. One of the core elements was the option for travel agents to apply the normal VAT arrangements in order to prevent distortions of competition from suppliers operating under the normal VAT rules.
ECTAA/GEBTA welcomed the Commission proposal and supported the new provisions introduced by the Commission. However, Member States were unable to reach agreement on a compromise text and in the end of 2003 the Directive proposal was put aside.
In 2008 and in 2009, the European Commission started infringement proceedings against a number of Member States for the incorrect application of the special scheme. Among other, the Commission takes the view that the margin scheme can only apply where the customer is the traveller, and thus it cannot be applied to supplies made between travel agents for onwards sale.
ECTAA/GEBTA have called on Member States to resume discussions on the revision of the special scheme. The industry would like to see the adoption of a scheme which would retain the existing benefit of simplicity but which would address the distortions and inequities inherent in the current arrangements.
In 2010 Member States have taken up discussions on the proposal for a revision of the margin scheme. Contrary to the Commission proposal and the industry request, Member States favour an extension of the scope of the margin scheme to all supplies, irrespective of the nature of the customer.
Date of publication: 28 January 2011