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Important Changes to EU tax Law

With effect from 1^st January 2010, the EU introduced fundamental changes to the VAT laws which have a direct impact on the treatment of VAT in the case of hotel bill-backs.

This item attempts to explain the changes in a succinct and understandable manner and simply present the facts in "bottom-line" terms. The changes being introduced are as a direct result of EU legislative changes and all Travel Suppliers offering hotel bill-back services are affected.

The changes surround a little-known piece of EU legislation called the Tour Operator Margin Scheme (TOMS). Copious documents regarding TOMS are available on the HMRC website, but very simply, TOMS has never allowed the recovery of VAT on the costs of travel supplied to an end user, (for example the recovery of VAT on a hotel room) when that travel has been paid for by a tour operator or Travel Management Company. Whilst ensuring collection of VAT on Business to Consumer Sales, this was not very helpful for Business to Business sales where input taxes can be offset against outputs.

Therefore, until 31^st December 2009, there was a TOMS "opt-out" scheme to cover Business to Business situations. This enabled Travel Management Companies (TMCs) to:

• Book and pay for travel services on behalf of clients, reclaiming the VAT element themselves.
• And then recharge identically to clients - the classic "bill-back" service.
• And then clients could reclaim the VAT element on the bill-back invoices that sent by the TMC.

The net effect of the above is that the TMC's VAT position is exactly neutral, HMRC receive and repay the correct amounts, the supplier (usually hotels) pays the correct amount of VAT and the end user reclaims the correct amount of VAT (subject to their VAT status of course - a clever "opt-out" scheme.

Unfortunately, on 1^st January 2010, this opt-out was removed and despite the subsequent 4 months of appeals and reviews, it is now clear that TOMS applies to all bill-back situations.

The largest potential impact is on hotel bill-backs and is as follows:

Prior to 1^st January 2010:

1. A TMC books a hotel room for Client A at a cost of £100 plus VAT

2. The hotel raises an invoice to the TMC for £117.50

3. The TMC applies a fee of £7 plus VAT

4. The TMC invoices Client A for £107 plus VAT (£125.73)

5. The TMC reclaims the £17.50 VAT on the hotel cost

6. Client A reclaims £18.73 VAT against the TMC's invoice.

Effective 1^st January 2010

1. The TMC books a hotel room for Client A at a cost of £117.50 including VAT

2. The hotel raises an invoice to The TMC for £117.50

3. The TMC applies a fee of £7 plus VAT

4. The TMC invoices Client A for £124.50 plus VAT on the fee only (£1.73)

5. Client reclaims £1.73 VAT against the TMC's invoice

Unless correctly managed, this change in legislation will mean all client hotel costs will increase by the VAT element.

HOWEVER IT IS AVOIDABLE IF THE CORRECT DOCUMENTATION EXISTS:

The new changes to TOMS, whilst removing the simple "opt-out", recognise Business to Business circumstances and provide for the end customer to reclaim VAT if their VAT registration permits. Of course it is not as simple or elegant as the opt-out........

On their invoices, Suppliers/Hotels must show the Traveller's Name and the name of the Company they represent/work for (e.g. a Customer of the TMC). These invoices can however be addressed and sent to a management company (e.g. Redfern). Provided the TMC is a "disclosed agent", and has a disclosed agency agreement with each of its Customers, TOMS does not apply and the TMC Customer can reclaim the VAT.

In effect, the contract for the purchase of the hotel room is between the client and the Supplier/Hotel, the TMC is simply a facilitator.

Under these regulations the TMC can no longer provide an "invoice" for bill-back transactions, but must provide a "remittance advice" or "statement for the recovery of disbursements". In doing so, payment is due to the TMC in the same way and under the same trading terms as previously, but, most importantly, clients can continue to reclaim the VAT on both the Supply/Hotel cost element as well as any fee element.

To achieve this, clients need to sign a Disclosed Agency Agreement (DAA). If clients do not sign the DAA, at VAT inspection, they run the risk of having to repay any VAT they may have reclaimed on bill-backs.