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06 September 2018 EU Advocate General releases two Opinions on the operation of Tour Operators' Margin Scheme On 5 September 2018, the Court of Justice of the European Union (CJEU) released the opinion of Advocate General (AG) Bobek in the two separate cases of Alpenchalets Resorts GmbH (Alpenchalets) and Skarpa Travel (Skarpa). Both cases consider the operation of the Tour Operators' Margin Scheme (TOMS) and could have implications throughout the European Union (EU) Member States if the Opinions are followed by the CJEU in its final judgments. Alpenchalets rented houses in Germany, Austria, and Italy, and subsequently leased them in its own name, as holiday accommodation. Additional services could be provided to customers as part of the holiday lease such as cleaning, laundry and a "bread roll" service. Alpenchalets calculated the value added tax (VAT) under TOMS using the standard rate of German VAT but later submitted a claim to the German tax authorities, contending that VAT due on the margin should be calculated using the reduced rate of VAT. The German tax authorities refused to repay the VAT contending that the reduced rate of VAT did not apply. The referring court sought to clarify what constituted a TOMS supply, specifically whether multiple elements were required. The referring court also asked whether the reduced rate of VAT for accommodation could apply to the accommodation proportion of the margin. In reaching his Opinion, the AG first considered whether multiple bought-in services are required for the TOMS to apply. The AG held that as long as there is one bought-in service of either accommodation or transport, the supply fell within TOMS. A previous reasoned order from the CJEU that there should be more than only bought-in accommodation or transportation has been disregarded by the AG as inconsistent with earlier case law. The AG therefore avoided the issue of having to decide whether ancillary services (such as those in the case at hand) are sufficient for "multiple" supplies to have been made. In respect of whether the reduced rate could apply to the margin, the AG held that the effect of the TOMS simplification creates a legal fiction that the supply is a single supply of "travel services." As a result of this fiction and the fact that the application of the reduced rates must be construed narrowly, the AG held that travel services could not be reduced rated as they are not listed in Annex III of the VAT Directive (Annex III lists goods and services to which a Member State can apply the reduced rate of VAT). On this basis, the reduced rate of VAT cannot apply to any element of the margin (accommodation or otherwise). The reduced rate still applies in respect of holiday accommodation (subject to local rules) and should the supply have been held to fall outside TOMS then the holiday accommodation would have been subject to the reduced rate in Germany and the supply of the chalets in Austria and Italy would have fallen outside the scope of German VAT. The case serves as a reminder for businesses to review the current VAT treatment of their travel supplies as many businesses may not realize that they are caught by TOMS. If the CJEU follows the Opinion, there may be risks for travel businesses which have historically treated elements of its travel supply margin as subject to the reduced rate. Conversely, if the CJEU diverges from the AG's opinion, there may be potential opportunities to submit claims if it is decided that the reduced VAT rate can apply to parts of the margin and Member States have not historically permitted this treatment. The Skarpa case considers when VAT should be accounted for using TOMS and how that VAT should be calculated. Skarpa's view was that VAT should not be accounted for when payments on account (POA) were received, but rather when it could determine the final margin. The determination of the margin would be some time after the payment on account was made as it is affected by a variety of factors including expected and final traveler numbers, exchange rates and unexpected costs. It is typical in the industry to price trips based on expected costs with the final cost often unknown until after the conclusion of the trip. The tax authorities considered that VAT became chargeable when the POA occurs, provided that the payment is made for a specific, clearly defined service. To determine the margin/taxable amount at that time, projected costs should be taken into account and an adjustment made when the final profit margin was established. The AG has confirmed that VAT is due under TOMS when payments on account are received despite difficulties in determining the final margin at that point in time. In terms of the method of calculation, the AG opines that the VAT calculated on the margin should be based on the difference between the sum received as the POA and the corresponding percentage of the expected margin based on projected costs for the given transaction. The AG acknowledges that this method has its own complexities but considered it the least onerous of the five methods suggested at the hearing and one that could be viewed to be within judicial interpretation of the current rules. The AG stated that Member States which have previously implemented or allowed a flat-rate margin for a given period have already been held by the CJEU to be incorrect in infringement proceedings. If the CJEU follows this Opinion, travel operators around the EU will need to understand how the local tax authorities intend to implement the decision, with the likely outcome that many tour operators will face new complexities as a result. Document ID: 2018-6056 |
