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The Travel Agents Margin Scheme

A New VAT Issue for Businesses in the Travel Trade

Dermot O'Brien

By Dermot O'Brien

This article is the first in a series of two articles on the subject

Background

On 1 January 2010, a new aspect of VAT legislation came into being. Known as the “Travel Agents Margin Scheme”, it brings tour operators and travel agents who act as principals into the Irish VAT net for the first time. A separate provision of the VAT legislation brings commission paid travel agents in to the net for the first time on the same date.

The mantra is that this change in law was introduced to bring Ireland into line with the rest of the EU. The reality is that Ireland had been doing its own thing for many years in this area and nobody seemed terribly bothered. Furthermore, when tour operators realised that they could recover wheelbarrows full of VAT because Ireland's VAT system was out of kilter with the Directive, something had to change. Nothing will prompt a change in tax law more quickly than the Department of Finance discovering that somebody is winning.

So, the House changed the rules. Arranging for the transport and accommodation of passengers and agency services in relation thereto would no longer be VAT exempt. If you thought that it would be a simple matter to make such services taxable, think again. There is a plethora of complications, including identifying where the supply takes place, what is the taxable amount, who is the accountable person, is the supplier acting as a principal or as an agent, what is the destination of the traveller – EU/non-EU? And so on.

The Impact of the Changes to VAT Law

The impact of the changes differs depending on whether the trader is a tour operator, a travel agent acting as a principal, a travel agent acting otherwise than as a principal or a combination of the above.

Tour Operators

Tour operators and travel agents acting as principal (see below for a comment on “acting as principal”) will have to account for VAT in accordance with the rules set out in section 10C of the Value Added Tax Act. This section sets out the “Travel Agents Margin Scheme”, or TAMS. In summary, the trader accounts for VAT on the difference (the margin) between the sale price of the product and the cost to him of the various “bought-in services”. Bought-in services are services which the operator buys in from other suppliers, rather than supplying them from his own resources (which services are referred to as “in-house services”). He does not get a VAT deduction for any element of the product he sells, e.g. hotel accommodation.

One practical issue for the operator is to identify “bought-in services”. If an operator buys ten seats on a specific flight to Malaga from an airline and sells them on as part of a package with accommodation in some Costa del Sol hot spot to a traveller, these flights are classified as “bought-in”. On the other hand, if an operator buys a number of seats from an airline on a certain route for a season, for example, these seats are now deemed to be “in-house services” and the value of them is to be excluded from the TAMS calculation. Similarly, if an operator block books a number of rooms in a hotel or apartment complex for a season, such accommodation when sold to the traveller would also be regarded as the supply of an in-house service. In-house services are to be valued at Open Market Value (OMV) for this purpose.

You may already be confused, so let us see if an example or two will help to clarify things a little.

Example One

A tour operator sells a package to a traveller consisting of a return flight to Paris and three nights' accommodation in a hotel there. He sells the package for €900. He buys a return schedule flight from an airline for €275 and the hotel sells the accommodation for €450. His total costs are €725 and his margin is €175. This amount is inclusive of VAT at 21%. His VAT liability is €30.37. Note that under the TAMS rules, he cannot get a deduction for the VAT on the hotel bill. The air travel is VAT exempt.

Example Two

A tour operator sells a holiday package to Ibiza to two hairdressers from Blanchards-town.

The total package for both travellers is €2,200. The accommodation in a third party hotel costs €880 and the flights are on a leased aircraft which the operator has taken for its exclusive use for the summer. The flights are an in-house service while the accommodation is a bought-in service. Accordingly, for the purposes of TAMS, the value of the in-house service has to be deducted from the consideration received and the balance is then subject to VAT on the margin. Assume that the value of the flights is €375 each, total €750. The TAMS liability is calculated as follows:

Consideration Received

2,200

Less: OMV Flights

750

Consideration for TAMS

1,450

Cost of bought-in service

880

Margin

570

VAT included at 21%

98.92

The flight element of the package is an in-house service and will not be subject to VAT as passenger transport is exempt. However, readers should note that if the flights were bought-in services, VAT would apply on the margin.

Another conundrum arising from TAMS is the issue of “acting as principal”. A travel agent, de facto, is treated as being a tour operator for VAT purposes where they are acting as a principal in the sale of a travel product. In essence, “acting as principal” means taking on the economic risk in relation to the sale of, say, accommodation or travel. This means that the travel agent buys flights or accommodation in his own name and then hopes to sell them. The critical thing is that he is the one carrying the financial loss if he fails to sell them at a profit, or at all.

If the travel agent is thus operating as a principal, then his VAT liability will be calculated under the TAMS rules. Otherwise, if he is simply operating as a commission agent, his commissions are subject to VAT but TAMS does not apply.

Sadly, that is all we have time for this month but look in the March issue of tax.point for more on deductible VAT, EU versus non-EU destinations, foreign VAT liabilities and who accounts for the tax. And by then, Dolly and Trixie will be back from Ibiza and we might have an update on the trip.

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