Why has my 13TH directive claim been refused? – PART 2
In Part 1 of this series, we looked at reasons why VAT claims are refused, and concluded that organisations which operate in certain sectors (e.g. Financial services, Insurance, Health, Education etc.) may be unable to recover all or part of their VAT and will often face restrictions to recovery of VAT claims.
Another very common scenario we often see is where a business (including those not operating in those sectors) organises hotel accommodation for its employees’ business trips to the European Union (“EU”). Alternatively, a US business may decide to hold its annual employees’ conference in a European capital which involves flights, accommodation, catering, tours, event management etc. The most obvious thing would be for the business to contact its corporate travel agent who will organise everything. If the travel agent doesn’t have EU experience this could be a mistake and result in the business losing significant amounts of VAT.
Chances are that if you buy hotel accommodation from a travel agent directly there won’t be any VAT charged on the invoice. Purchase the same hotel room directly from the hotel in the EU and you will be charged VAT. You may think that travel agents don’t get charged VAT, but this would be a mistake.
To explain, lets take a brief detour. The chances are that a non-European travel agent will buy in the accommodation etc. from a travel agent located in the EU. The EU operates a special scheme called the tour operators’ margin scheme, also known as TOMS. This applies to businesses that buy in and re-sell travel, accommodation and certain other services. Under TOMS, businesses account for VAT on the margin (or profit) they make on the supply. Use of TOMS prevents the need for travel agents to register and pay VAT in each EU member state a customer travels to and was introduced as a simplification relief. More importantly, as a result, a travel agent operating under TOMS may not issue an invoice separately showing the VAT. As we know no VAT invoice = no VAT recovery.
Contrast this with a business traveller who stays in an EU hotel and pays for the room directly to the hotel. Upon request the hotel will raise an invoice showing VAT. The business employing the traveller can then submit a 13th Directive VAT claim and recover the VAT.
Are we suggesting never to use a travel agent or event organiser for EU travel or events? No! Good travel agents and event organisers will be aware of the issue and can still provide their services and allow businesses to recover VAT. They do this by acting as a disclosed agent between hotels, caterers etc. (suppliers) and their customer. They arrange for the supplier to issue an invoice to the end customer showing VAT, and the customer can then use this invoice to recover VAT. The travel agent makes a separate charge for its agency or organisation services – such services should normally be without VAT if the customer is located outside the EU.
Of course, this means that travel agents, event organisers will need to disclose their profit margins. Clearly some agents will be nervous of this, but many travel agents or event organisers in the know are used to this and businesses acknowledge the additional value a good travel agent or event organiser adds and are happy to pay for this.
It is worth noting that a travel agent operating under TOMS still gets relief for VAT on costs since it only pays VAT on the margin. Using a travel agent who operates as a disclosed agent, does somewhat lower the cost of VAT on the agent’s commission or margin. In addition, it ensures that there are no nasty surprises regarding the possibility of recovery of VAT.