VAT windfall in the wings for buyers

4 October 2005
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05 October 2005 | Amon Cohen

Some travel buyers are in line for massive tax breaks under a government ruling. Also, as the guidance is to be applied retrospectively the size of the payouts is greatly increased.

Some financial institutions can expect a tax refund from HM Revenue & Customs of up to £500,000.

The windfall will follow clarification expected this month from HMRC specifying that the majority of fees charged by travel management companies (TMC) should be zero-rated for valued-added tax.

Most TMCs had been applying a 17.5 per cent rate since introducing fees around five years ago. However, Business Travel International (BTI) UK and its two largest competitors, American Express and Carlson Wagonlit Travel, had lobbied for clarification of the rule, questioning whether they should charge the rate.

HMRC has confirmed to SM that it will issue the ruling shortly. The clarification will benefit organisations which are exempt from VAT and are restricted in reclaiming VAT on bills from suppliers. BTI UK, the country's largest TMC, estimates some of its largest VAT-exempt clients, especially banks and insurers, will save £100,000 per year as a result.

Better still, HMRC is applying the ruling retrospectively. Credit notes will be issued for all overpayments in the past with no time limit. Companies will be able to claim the money back or use the credit notes for future payments to their TMC.

BTI UK expects that some clients will see reimbursements stretching back up to five years.

Tim Snow, head of procurement at Prudential, said: "This is great news. Until now, TMC fees have been VAT-able even though what they were booking for us was exempt." HMRC is ruling on a principle that TMCs should apply the same rate of VAT on their fees as applies to the services they are booking.

Air and rail tickets, for instance, are zero-rated, as are hotel and car-hire bookings outside the EU, so TMC's fees for selling them will also be zero-rated.

Hotel and car hire within the EU carry a rating of 17.5 per cent, so TMCs' fees for booking them will match accordingly at 17.5 per cent VAT.

Inconsistent advice from tax offices meant that some TMCs were applying a zero rating, while others were charging 17.5 per cent.

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