European Court Reshuffles VAT Rules for Travel Agents

The European Court of Justice handed down a decision in 8 cases brought against Member States for the incorrect application of the special VAT scheme for travel agents. Travel agents all over Europe will now have to apply the margin taxation scheme to supplies of travel services to all types of customers and may no longer benefit from the essential simplification of a global margin calculation.   

The Court dismisses the actions brought by the European Commission against Poland, Italy, the Czech Republic, Greece, France, Finland, Portugal and Spain for failure to comply with the special VAT scheme applicable for travel agents, as provided for in article 306-310 of the EU VAT Directive.

The Commission contended that the special VAT scheme for travel agents is applicable solely to sales of travel services to the ‘travellers’, i.e. legal and natural persons using the travel services. The extension of the special VAT scheme for travel agents to other supplies of travel services, such as supplies to other travel agents (so-called wholesale supplies), is not allowed. This misinterpretation is due to a mistake in the same language versions of the Directive, which incorrectly uses the broader term of ‘customer’ rather than ‘traveller’.

In its judgments, the Court acknowledges the different use of terms in the various language versions and even within the same language version. In light of these divergences, the EU provisions must be interpreted by reference to the general scheme and purpose of the rules of which it forms part. In that regard, the Court considers that an approach consisting in applying the special scheme to any type of customer is the best way of achieving the aims of the scheme.

It enables travel agents to benefit from simplified rules regardless of the type of customer to whom they provide their services, while encouraging a fair distribution of receipts between the Member States. Thus the special VAT scheme must apply to all sales of travel services in accordance with Article 306 of the VAT Directive and cannot be limited to supplies made to ‘travellers’.

The Court’s judgment will have far-reaching consequences for travel agents in the other 20 Member States, which will now have to change their legislation to bring it in line with the Court’s decision.

The extension of the scope of the special scheme to all supplies of travel services in accordance with Article 306 of the VAT Directive will no doubt create distortions of competition between travel agents and the suppliers of the underlying services (e.g. hotel, transport undertaking etc.) as the margin scheme denies taxable customers the right to recover input VAT on the underlying travel services, to the extent that VAT can be partially or fully recovered on such services (there are different rules in Member States on VAT recovery on costs such as hotel accommodation and meals incurred in the course of business), and the VAT on the travel agent’s margin.

Any cause that inhibits a right to recover VAT that is otherwise deductible in the intermediary consumption stage for a business customer is contrary to the basic principle of neutrality of the Community VAT system and will leave such taxable customers financially better off to buy the services directly from the service suppliers.

As regards Spain, the Commission claimed four further infringements of the EU VAT provisions for travel agents, notably the exclusion from the special scheme of retail agents selling in their own name travel services put together by wholesale agents, the issuance of an invoice with VAT not related to the output VAT due, the right to input VAT deduction restricted to services supplied in Spain and the use of a global margin calculation.