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Brussels, 18th February 2002

VAT: Commission proposes to simplify rules for travel agents selling holiday packages

The European Commission has presented a proposal to modify the special value added tax (VAT) rules applicable to travel operators selling holiday packages for destinations within the European Union. Under the present special rules, travel agents are normally authorised to charge VAT on their profit margin instead of on the full value of their sales. The proposal would amend these rules to eliminate double taxation problems which currently arise when travel agents make sales to other agents rather than the public. The proposal would also remove unfair competitive advantages for some travel operators arising due to uneven application of the current rules by different Member States and to the non-application of VAT to non-EU operators selling holiday packages to EU residents. The proposal would also modernise and simplify the special rules.

"This proposal would create a level playing field for travel agents in Europe and eliminate competitive distortions" said Frits Bolkestein, Commissioner for Taxation. "I welcome the support of European travel agents organisations for the proposal".

More uniform application of the margin scheme

The Commission proposes to broaden the scope of the special scheme for travel agents whereby they can charge VAT on their profit margin instead of on the full value of their sales. In particular, the proposal would allow travel agents to apply it to sales to other travel agents as well as to members of the public. Nowadays, with increased specialisation in the travel business, many travel operators no longer deal solely with individual travellers but also sell packages to other operators. The proposal would also eliminate the current option for Denmark, Ireland and the Netherlands to exempt operators from VAT. Travel operators have complained to the Commission that the fact that some Member States apply the margin scheme only when the package is sold to an individual traveller while others are more flexible and allow the margin scheme also when the package is sold to another travel operator causes problems of unfair competition between travel operators and double taxation.

Inclusion of non-EU travel operators in the scope of the VAT rules

The Commission proposes to ensure that non-EU travel operators would have to register and pay VAT in the EU Member State to which they supply travel services. With the increased use of the Internet as a means of selling travel services, travel agents or tour operators established in third countries are increasingly supplying travel packages to EU residents. This leads to a clear distortion of competition since, at present, a travel package is taxed under the margin scheme when it is supplied by an EU established tour-operator but it is not subject to tax when it is supplied by a tour operator established in a third country.

Optional provision to cater for sales to business clients

The Commission proposes to allow travel agents to opt for the application of the normal VAT arrangements instead of the margin scheme if they so choose. This will resolve the problems that arise when a travel agent is involved in supplying travel packages to businesses or other traders subject to VAT. The VAT element of travel packages sold by a travel operator who has benefited from the special margin scheme cannot be separated from the rest of the cost. This means that when a business customer orders a travel package from a travel agent it is not allowed to deduct the VAT included in the cost of the package, even though it should normally be able to deduct VAT on such services received for business purposes. Consequently businesses have an incentive to deal with individual suppliers of elements of a package, who are subject to normal VAT rules, rather than a travel agent, in order to be able to deduct VAT.

New simpler definition of the "profit margin"

Several Member States have encountered difficulties in calculating the profit margin under the travel agents special scheme. The Commission therefore proposes a new more detailed and precise definition, as well as comprehensive rules to establish the selling price and the cost price.

Single profit margin for travel packages supplied in a certain period

In order to simplify the system, the Commission also proposes to allow travel agents to calculate one single profit margin for all supplies of travel packages during a certain period. There is often a gap between the period when the travel agent sells the package and the date on which he gets the invoices from his suppliers, which makes it very difficult for him to determine the profit margin for each individual package he sells.

Background on the "margin scheme" for travel agents

The European Community VAT system includes special rules (the "margin scheme") for applying VAT to travel operators. This margin scheme is obligatory but Denmark, Ireland and the Netherlands, which exempted the supplies of travel packages by travel agents at the time the present rules were adopted, were allowed to maintain that exemption.

The objective of the scheme is to prevent the complications that travel agents would have in applying normal VAT rules to travel packages which include services supplied abroad. When, for example, a travel agent purchases hotel accommodation and transport from third parties in other Member States and puts them together in a travel package to sell in his own name he would be subject to VAT on the entire package in his own Member State. He would be entitled to a refund of VAT charged abroad on the hotel accommodation etc. but would have the inconvenience of having to reclaim it from the other Member States. Under the margin scheme all the elements of a single travel package are treated as one supply of services for VAT purposes, taxable in the travel agents' own Member State. He has no right to deduct or reclaim VAT on supplies made to him but on the other hand he is only taxed on his profit margin on the supply of the travel package.

The full text of the proposal is available on the Europa internet site:

See also MEMO/02/30.

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