Travel Agency Discounts Are Vattable, Says UK Appeals Court

by Robin Pilgrim, LawAndTax-News.com, London

10 July 2006

Judgement in the UK Court of Appeal in the case of First Choice Holidays has confirmed that discounts offered by travel agencies to travellers are not exempt from VAT payable by the agency.

In some circumstances, tour operators agree to discounts being given by the travel agent on the understanding that the tour operator will only receive the discounted price the customer pays. In others, says HM Revenue and Customs, the travel agent itself subsidises the discount to the traveller and pays the tour operator the full advertised selling price of any travel services sold. In these latter circumstances the tour operator must account for VAT on the full, advertised price.

The Court of Appeal referred the case of First Choice Holidays to the ECJ which concluded that "the 'total amount to be paid by the traveller' ... includes the additional amount that a travel agent ... must ... pay to the tour operator on top of the price paid by the traveller and which corresponds in amount to the discount given by the travel agent to the traveller on the price of the holiday stated in the tour operator's brochure."

The judgment means that there is no change to HMRC's policy on discounts within the Tour Operators' Margin Scheme (TOMS), which is that the consideration for travel services is the total received by a tour operator, including any discount offered by a travel agent. As such, this is the amount that should be used to calculate the selling price for VAT purposes and, where applicable, entered into the TOMS calculation. It also confirms that there is no separate supply of a 'right to a discount', as found by the High Court.

During the lengthy appeals process, HMRC had issued 'protective' assessments of VAT due on the discount element of supplies by tour operators, and it will now enforce those assessments against firms that have not paid them.

HMRC says that where tour operators have already declared and paid VAT in line with HMRC's view (either via their VAT returns or by paying the preferred protective assessments issued to them), the VAT paid should already be correct. Protective alternative assessments, issued to tour operators, based on the High Court view of transactions, will now be withdrawn and voluntary disclosure claims utilising the High Court decision will be formally rejected (if this has not already been done). Any protective assessments issued to travel agents who reclaimed input tax on separate 'top up' supplies made to them by tour operators will now be enforced, because it has been determined there were no such supplies and therefore there was no entitlement to input tax.

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