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Thursday, 10 December 2009

VAT the Travel Trade and Alistair Darling

Alistair Darling’s Pre-Budget Report (PBR) today contained few surprises apart, perhaps, from the reduction in bingo duty from 22 to 20% - that’s certainly going to stimulate the economy then.

Perhaps the biggest non-surprise was that Darling confirmed that VAT would revert to 17.5% from its current reduced rate of 15% on 1 January 2010.

Some will have breathed a sigh of relief that VAT was not increased to a much higher level to plug the gap in public finances (the UK’s net debt is forecast to be 78% of GDP by 2014-15 even with the return of VAT to fits former rate). Some analysts had suggested that VAT would rise to 20% or even 22.5%.

But while we are now clear on what the rate of VAT will be on 1 January, there is still some uncertainty over the treatment of VAT for billback services provided by hotel booking agencies and travel management companies.

New Year’s Day 2010 is also the date on which the UK implements changes to the Tour Operators’ Margin Scheme (TOMS). Although this sounds irrelevant to the business travel industry, it may have substantial implications.

The changes to TOMS, which the UK has been forced to implement as part of the European VAT Directive, say that from that date travel companies that buy in services and sell them on to businesses “for their own consumption”, eg business travel for employees, will no longer be able to claim back the VAT. In the case of hotel billback, this could mean the travel company will have to pass on the VAT charge to the business. Suddenly, businesses would be facing 17.5% higher costs (although thankfully not 20 or 22.5% after today’s PBR).

A brief from HM Revenue and Customs at the end of last week (http://www.hmrc.gov.uk/briefs/vat/brief7409.htm) appears to say there is no way out for the UK’s agencies. However, many are likely to challenge this interpretation, via their accountants and legal teams. A substantial and unexpected VAT bill is the last thing that agencies want at the moment.

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