The current special VAT margin scheme for travel agents

The main VAT legislation (the Sixth VAT Directive) which was adopted in 1977 included special rules for applying VAT to travel agents and tour operators.

The objective of the special rules for travel agents and tour operators is to prevent the complications that the application of the normal VAT rules would cause where such packages comprise services provided outside the Member State concerned. When a travel agent purchases services such as hotel accommodation and transport from third parties in other countries and puts them together in a travel package to sell in his own name and on his own account to a traveller he would, under normal VAT rules, 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 single travel package 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 – for example, VAT on the travel element would most likely go to the country where the travel operator is resident and where the profit is generated, while the VAT on the hotel accommodation is allocated to the country where the holiday takes place and so on

The special scheme only applies to packages for travel and lodging in the EU. Travel operators providing travel packages to places outside the EU are exempt from VAT.

Exemption from VAT in some Member States

Although this special scheme is obligatory, certain Member States (Denmark, Ireland and the Netherlands), that exempted the supplies of travel packages by travel agents at the time this Sixth VAT Directive was adopted, were allowed to maintain this exemption during a transitional period

The proposal to update the scheme

An extension of the scope of the special scheme to cover supplies of travel packages sold to other taxable persons was proposed to eliminate problems of double taxation. These problems arise as, nowadays with increased specialisation in the travel business, travel operators no longer only deal directly with individual travellers but also sell packages to other operators.

At present the individual Member States apply the special VAT arrangements for travel agents in very divergent ways. In some circumstances this can create competitive disadvantages for some companies. Therefore it is proposed to abolish the existing derogations which have been given to the Member States, in order to achieve equal treatment within the EU.

Businesses often prefer to deal with individual suppliers, rather than use travel agents' packages, because they cannot deduct VAT incurred on travel packages, which they purchase under the special travel agents VAT scheme. To remove this competitive anomaly, it is proposed, when travel agents supply travel packages to taxable clients, that they may opt for the application of the normal VAT provisions.

Travel operators established outside the EU are outside the scope of the VAT scheme. Using the Internet, they can now easily sell travel packages to EU residents and this causes competitive problems for EU travel agents. To remedy this, it is proposed to tax in the EU all travel packages when they are used and enjoyed in the EU by EU residents. This implies that suppliers of travel packages established in third countries might become liable for VAT in the country where their customers are established.

Modification of the original proposal

When the European Parliament was considering the Commission proposal they suggested that travel agents established outside the EU be allowed to deal with only one EU VAT administration rather than having to deal with a number of them. This principle has already been accepted in the context of the VAT on the supply of services on the internet. The Commission has decided to amend its proposal accordingly.