Agents warned of time-bomb tax

Travel agents could be landed with a bill for up to four years backdated VAT following the introduction of Flight Plus next April, On Holiday Group chief executive Steve Endacott warned this week.

He believes that as the changes to ATOL regulations will make agents responsible for providing clients with financial protection for dynamic packages, they will be treated as principals by the inland revenue and liable for TOMS VAT.

In an open letter sent to both ABTA and the Civil Aviation Authority, Endacott said the issue was "a ticking time bomb, which could bankrupt many unsuspecting agencies".

He is demanding that both bodies seek written clarification from HMRC on exactly what contractual arrangements must be put in place once Flight Plus is introduced.

Endacott fears that HMRC will go after travel agencies in the same way that it has sought to recover £7m from bed bank Med Hotels, which it believes is acting as a principle and should pay TOMS VAT

Med Hotels has been cleared of liability for VAT by the courts, but HMRC has sought leave to appeal against the decision, leaving accommodation providers uncertain where they stand.

“The Med case has cost millions and has dragged on for several years, causing uncertainty and disruption to the bed bank sector," wrote Endacott. "The fundamental premise of the HMRC case is highly relevant to Flight Plus. Although, Med hotels had contracts in place stating they acted as the agent of the hotel, HMRC claimed that Med Hotels took financial risk on some transactions and as such their behaviour overrode the contractual position, meaning they should be treated as a principal paying TOMS VAT.”

Endacott points out that agents with a Flight Plus ATOL licence will be required to replace flights if an airline fails, therefore they will be taking a similar financial risk. Applying the same arguments HMRC has used in the bed bank sector would indicate that HMRC are likely to turn their attention to Flight Plus agents and impose TOMS VAT charges, he said.

 Endacott also pointed out that AITO have already told HMRC that they should impose the same VAT regime on all ATOL holders to ensure a level paying field from their perspective.

Although HMRC has already told the CAA is does not believe a Flight Plus holder will automatically be liable for TOMS VAT, Endacott pointed out it has not issued any clear guidance and it has not made an industry-wide exemption.

Endacott called on ABTA and the CAA to jointly approach HMRC now, giving agencies time to make sure they have the right contractual arrangements in place to avoid TOM’s VAT.  He said that rather than paying an extra £15 per passenger it will cost to have a Flight Plus ATOL, many agents would sidestep the regulations by acting as an agent of the customer.

“If TOMS VAT was also payable, the cost advantage of acting as the agent of the customer would be over whelming," he added. "Customers want cheaper holidays and would probably accept this technicality if it that allowed them to avoid further taxation and get exactly the same holiday £25 per person cheaper”

Whilst ABTA said it didn't believe Flight Plus will have any retrospective repercussions it is seeking clarification from HMRC. A spokesman added: "Defining agency status is difficult even today, and will continue to be under the proposed Flight Plus arrangements. 

"This really emphasises just how important it is for travel businesses to understand what their own business model looks like and what written contractual arrangements they have in place.  Under the new proposals, an ATOL holder will be required to have a written agreement in place for agency sales.”

By Linsey McNeill