Plans to make online travel booking agents "platforms" responsible for paying VAT in the EU
posted 20th April 2023
Late last year, we shared the news that the European Commission had published proposals to make travel booking "platforms" pay local EU VAT from 1 January 2025 in certain circumstances. The proposal is that online platforms located anywhere in the world, including the UK, will be required to pay EU VAT when:
- Their platform provides the means to sell short term accommodation rental or passenger transport;
- The platform acts as disclosed agent;
- The accommodation/transport service is in the EU; and
- The service provider (or principal supplier) itself does not pay VAT.
This is likely to affect online booking platforms such as OTAs, holiday home rental agencies and other similar businesses. Any businesses which operate in these ways should consider how these proposals may affect them now. The EU Commission hopes to introduce this from 1 January 2025 (although, as always with VAT developments, things can be slow moving, and the EU hasn't confirmed the details yet so we may be saying "its round the corner" for 5 years or so).
Nevertheless, its best to take them at their word and ensure that we are all prepared. As we are now heading into mid-2023 (how did that happen!?), many businesses will be well ahead of planning their sales, rates, and contact negotiations with suppliers for the 2024 financial years onwards. We wanted to ensure that businesses have the information to plan ahead and understand the possible risks.
What are the current VAT rules for online platforms?
At present, if a business acts as principal in selling accommodation or transport, it is required to account for VAT in the place in which the service takes place (or, in many cases, rely on the TOMS rules to avoid this requirement, and often avoid VAT altogether for the time being now that the UK has "Brexitted").
However, many online platforms act as disclosed agent for the service provider instead such that they are not currently required to pay VAT locally. Strictly speaking, in such cases the service provider themselves should often be registered and account for VAT locally. However, sometimes due to a lack of knowledge (to be generous) or a difference in the rules between countries, this is not the case and this can mean distortions of competition (for example, between hotels which are VAT registered, and apartments rented by people privately who are operating outside of a VAT regime for whatever reason). In any case, as disclosed agent, it is not the agent's responsibility to account for the VAT on the supply of the travel service itself.
Instead, the agent is only responsible for the VAT treatment of its commission or fee. Where agents earn a fee from someone operating a business activity (which will be true of almost all suppliers) then their commission/fee is subject to the normal VAT rules and as such they would only be required to account for UK VAT on their commission if the supplier is established or ordinarily resident in the UK. If earning a fee or commission from a B2C customer, the agent should strictly speaking account for VAT in the place where the service takes place already (or the supplier's location if the supplier is using TOMS).
What are the proposed changes?
From the current proposals, we understand that in these cases, the platforms acting as disclosed agent will be treated as making a deemed supply of the accommodation or transport and so will be required to account for VAT as if they were themselves the service provider (albeit we assume using their own selling price based on the suppliers fee plus the agent's commission). We understand that they will not be allowed to account for VAT within TOMS and so would need to instead account for local VAT to each member state, assuming that country requires payment for that service (some, for example, have exemptions for short term lettings at the moment, although it is proposed that this exemption be withdrawn). I expect that the platform would not have any VAT to recover on its purchase by definition, so this would be a considerable dent to its profits unless it reduced its payments to the service providers by the amount of tax due.
The proposals allow for platforms to be excused the need to pay VAT in some circumstances (e.g. where its role is limited) but these are not yet clear. It may be that these exclusions could provide relief for some, but my opinion is that we should not rely on this for planning purposes.
There are also many other questions at this point - for example, what is a "platform" and what constitutes accommodation and transport? How are packages affected? What is the price point at which VAT should be accounted for? How is VAT accounted? What is the definition of an agent? My suggestion as always is that we should assume that this will go ahead and that the rules will be fairly strict - the whole point of this is that the EU Commission wants to try and recoup some VAT it believes is "missing" and has decided to use the "digital age" to do so. It has also made some very detailed proposals on VAT in the digital age to show that it means business!
Another thought I personally have on this is that, the reason these rules are coming about is because the suppliers should be registered...but aren't. It may be that the answer here is for online platforms to have conversations with their suppliers to ensure that they are themselves complying with local legislation and registering their business for VAT. If suppliers all did this, it would probably prevent agents from being required to register locally and result in the least amount of blocked VAT...but perhaps that is just wishful thinking!
How will this affect online platforms?
If this does go ahead, it is likely to bring a huge amount of change for online travel agents and similar in the following ways:
- Platforms will need to factor in VAT payable on supplies of accommodation and transport in different countries. As there will by definition be no VAT for them to recover from their "suppliers" this could mean a huge cost and may erode profits substantially.
- Platforms are likely to have some admin work regardless of whether their suppliers are registered, as we understand that platforms will be required to request registration details from all VAT registered suppliers to pass to the Commission as evidence.
- Platforms will need to ensure that they are ready to abide the reporting requirements by the date of effect. Obviously this is difficult at the moment as we don't quite know what the requirements are(!) but platforms will need to ensure that their systems are able to identify the relevant sales and that a mechanism is in place to account correctly.
What can online platforms be doing now?
Obviously without having the detail, its tricky to plan ahead. However, we would advise the following for sales plans for 2025 onwards:
- Consider whether VAT needs to be factored in and make any necessary negotiations with suppliers, based on the VAT rates for each service within each relevant country.
- Consider whether your contracts with suppliers allow you to change the price based on VAT requirements and, if not, consider renegotiations of contracts.
- Consider what countries a VAT registration may be required in, or if the One Stop Shop rules can be sued, consider which country may be the best basis for this.
- Consider whether an agency model is actually beneficial going forward or whether it may be better to move towards acting as principal (and relying on the TOMS rules, and the fact that currently registrations are not required in most cases in most member states for UK businesses whose sales fall under UK TOMS).
- Consider approaching your suppliers to question their VAT status and whether they should be registered.
- Keep up to date with the developments so that you know how you are potentially affected.