FEATURE: An administrative nightmare (November 2)

An administrative nightmare is approaching travel management companies over new rules on where VAT is liable. But the agencies seem to have decided the best way to deal with it is to carry on as before. ABTN reports.

Dealing with VAT, both paying and re-claiming it, is a tricky and complicated activity. If it has to be done then it is best done by mathematically-minded experts and even then the return can often be marginal.

Usually the experts have to deal with VAT in just one country. But imagine if that process had to be applied to all 27 individual members of the EU. The word nightmare springs to mind. But agents fear that that is what a change in VAT rules by the EU is threatening.

If that were the case, it could also cost TMCS thousands of pounds to administer, costs that would almost certainly be passed onto to clients.

But it seems the general view of UK TMCs is that the best approach is to carry on as before.

The Brussels bureaucrats have sent out a new EU Value Added Tax Directive which is due to come into force on January 1. This concerns the "place of supply of services rule". This determines in which a country a service is liable to VAT.

For example, if the service is provided in Sweden, then the tax is liable there, if it were in Germany, then the tax is liable in Germany.

But the new directive suggests changes to this. The first change, under Article 44 of the directive and according to Chris Gibson, Director of Taxation at HRG, is "the place of supply of most services will shift from the location of the provider to that of the customer".

This means that from January 1 when the changes come in, the tax will be liable in the country where the client is located.

Mr Gibson said this would "reduce the amount of foreign VAT suffered by business customers and enable them to recover any VAT through their existing VAT returns".

But it is the second change that has given rise to major fears. Article 47 deals with VAT on immovable properties which, agents believe, can be interpreted as hotels.

TMCs believe that if this is the case, they will need to register in each and every EU country where they book hotels. For a global TMC this could be all 27.

They would also have to charge VAT from each country to clients who would be faced with the frightening task of claiming it back.

So not only would TMCs be faced with the administrative mountain of registering and dealing with VAT in each country, their clients would be faced with the near impossible task of getting it back.

Philip Carlisle who has been working on these proposed changes for months with executives from agencies including American Express, Carlson Wagonlit Travel and HRG, said: "If you are a global TMC, it is likely that you will be booking people into hotels in more than one EU state.

"You would have to register in every state book a hotel and your client would have to register as well."

He describes such a scenario as a "nightmare and a nonsense."

Nigel Turner, CWT's industry affairs spokesman, agreed. "This would be an administrative nightmare. You would have to register and account for VAT in each of the 27 countries."

To make matters worse Her Majesty's Revenue and Customs (HMRC) raised this issue on behalf of the UK with the EC but somehow the matter has since fallen off the agenda.

The good news is that HMRC is taking -or seems to - a pragmatic approach amid the concerns that such a scenario would be unacceptable. If this proves to be the case, it would mean, said Mr Carlisle that it became the government's fight rather than the TMCs'.

It has never actually been confirmed that the TMC interpretation that Article 47 applies to hotels. So until that happens, hopefully before the end of the year, TMCs seems set to carry on as before.

 "It is still sort of advisory," Mr Carlisle said. "But that would be good enough for us."

But HRG, Amex, CWT and some members of the GTMC have told HMRC that, having had no guidance, they intend to adopt the "general place of supply rule for hotel bookings".

Mr Gibson told ABTN: "The problem here is lack of guidance where there is lack of clarity in the new VAT rules which make it hard to comply with tax law."

The decision will maintain the status quo and said HRG "lead to simpler administration for both itself and its clients".

Mr Gibson said: "We have proactively taken the only sensible, pragmatic and technically sound approach to this challenge which is to apply the general place of supply rule.

He said the new rule would cause the travel industry to "suffer a disproportionately damaging impact".

He added: "We cannot assume that this would be the intention of the rule changes which have been promoted by both the Commission and Tax authorities in general as being aimed at simplification.

"Most importantly for us, our solution enables us to continue to look after the very best interests of our clients as it means that they will not have to face the complexity of multi-jurisdictional VAT charges and tax invoices.

"In addition, our position is consistent with the Commission's objective of simplifying VAT administration for business to business transactions."

www.hmrc.gov.uk  www.gtmc.org