CJEU: travel agent could not reduce VAT liability when it discounted price of holiday customers

The ruling by the Court of Justice of the European Union (CJEU) in a German case could have an impact on all intermediaries participating in transactions between a customer and another company, according to tax expert Stuart Walsh of Pinsent Masons, the law firm behind Out-Law.com.

"In light of this ruling all intermediaries – not just those in the travel sector – that effectively sacrifice an element of their commission by making payments directly to their principal's customers should review their existing contractual provisions to determine whether they need to consider making a voluntary disclosure for underpaid VAT," he said.

"They should also consider whether to restructure their existing arrangements with principals, if this would improve VAT efficiency on an ongoing basis," he said.

Ibero Tours arranged travel services which were provided by tour operators to customers. It received commissions from those tour operators in exchange for its intermediary services, on which it accounted for VAT in full. Between 2002 and 2005 the firm offered customers price reductions, funded out of its commission payments, on the price that they paid for their travel. It then applied to reduce the taxable amount of its commission payments received for VAT purposes by the amount of the price reductions it passed on to customers.

The VAT Directive allows for the taxable amount to be reduced retrospectively for the purposes of accounting for VAT when the price is reduced after the relevant supply has taken place. In addition, previous EU case law allows for the value of a taxable supply to be reduced to reflect a retrospective discount given to a customer. Although the German courts initially ruled in favour of Ibero, they referred the case to the CJEU when the tax authority appealed, noting that the existing provisions required the reduction to be at the expense of the ultimate supplier of the services to the customer.

The CJEU found that these provisions did not apply in this case, as they governed the situation in which there had only been one supply of taxable services. In this case there had been two taxable supplies: the travel services provided by the tour operators and Ibaro's intermediary service. Although the discounts Ibero provided to its customers reduced the final price that they paid, it did not affect either the amount of commission Ibero received from the tour operators or the amount that the tour operators received from the customers for the travel services.

Distinguishing the circumstances in this case from the existing case law, the CJEU noted that Ibero discounted the price paid by the final customer "on [its] own initiative and at [its] own expense".

"In the circumstances at issue in the main proceedings, the tour operator is not at the head of a chain of operations, as it provides its services directly to the final consumer, with Ibero Tours intervening as an intermediary in that single transaction only," it said in its judgment. "Ibero Tours, however, provides a service, namely as an intermediary, which is totally separate from the provided by the tour operator."

"Furthermore, the tour operator, in the case in the main proceedings, gives no discount since Ibero Tours is, in any event, bound to pay the tour operator the agreed price, regardless of any discount that Ibero Tours gives to the traveller. In those circumstances, the financing by a travel agent, in the situation of Ibero Tours, of a part of the travel price which, with regard to the final consumer of the travel, takes the form of a price reduction for that travel, affects neither the consideration received by the tour operator for the sale of that travel nor the consideration received by Ibero Tours for its intermediation service," it said.

"According to professional services firm Deloitte, many UK travel agents have made similar claims of HM Revenue and Customs (HMRC) in relation to overpaid VAT," said Walsh.