Skarpa Travel s.p. European case: important clarifications regarding the VAT Tour-Operating margin scheme (TOMS)

This article was originally published in Le Quotidien du Tourisme on January 21, 2019. It is reproduced on our blog with the agreement of the publisher.

VAT Tour operator margin scheme: the EUCJ confirms the application of the VAT liability at the time of payment receipt, and proposes to use a forecasted margin rate to take into consideration that the actual margin is not determined at the time where advance payments are received. This said, the Court also rules again the principle of computation of the margin journey per journey, jeopardizing the neutrality principle for operators subject to the TOMS.

At the end of last year, the Court of Justice of the European Union handed down a decision in the Skarpa Travel case (EUCJ 19/12/2018, C-422-17).


In this case, the Court had to deal with two questions:

  • Are services covered by the specific VAT TOMS subject to the general rule for VAT liability applicable to services (at the time where customers pay deposits when they book their journey), or is it possible to consider a derogation rule in order to take account of the specific computation of the taxable basis (the VAT chargeability would then occur at the time when the final margin would be known) ?

With no surprise, the Court ruled that, in the absence of any specific provision concerning the timing for VAT collection under the TOMS, the standard rule must be applied. Consequently, VAT collection must take place, for services, at the time where deposits or any other sum making up the price of the journey is cashed in (provided that the elements of the journey are designated with sufficient precision).

This solution does not give rise to any specific comment. It is in line with the decision taken in Commission v. Germany (C-380/16 of 8th February 2018), in which the EUCJ ruled that in the absence of specific provision providing for a calculation of the margin per tax period, the operators must compute their taxable margin on a transaction-by-transaction basis (individual journey per individual journey).

  • This leads to the second question: how to determine the taxable basis at the time of receipt of the instalments, whereas the amount of expenses attributable to the journey is not yet known?

Indeed, Article 308 of the VAT Directive provides for that the taxable margin is determined by deducting the “actual cost” of the services purchased from the price paid by the customer. according to such terms, the use of any “planned” or “budgeted” costs seemed excluded. However, the Court states in its judgement that “the agency’s profit margin can be determined on the basis of an estimate of the total actual cost it will, ultimately, have to bear”. The EUCJ, by building a concept of “estimated” margin, is therefore innovative and remedies to a lack of the EU law.

As regards practical implementation, the EUCJ proposes a two–stage process: at the time where installments are cashed in, the taxable basis can be determined by application of a theoretical margin ratio, based on anticipated actual costs. When the “definitive” margin is determined, the VAT previously paid is to be adjusted in a VAT return.

Of course, this innovation is to be welcomed. This said, it does not neutralize the negative consequences of the Decision Commission vs. Germany of early 2018, rather the opposite. As mentioned above, in this decision, the EUCJ has ruled that the exclusive methodology to compute the taxable margin is on a trip per trip basis, denying any possibility to use a periodic methodology.

First, and irrespective of the Advocate General’s view (appropriated by the Court) according which any travel agency concerned about not incurring losses will probably draw up a detailed estimate of the expected costs before organizing and promoting a trip, it cannot be questioned that the computation of the margin on a journey per journey basis is highly detrimental. Indeed, it requires significant administrative treatment, meaning an additional cost for the operators, which largely exceeds what taxpayers are liable to do (indeed, it should be reminded that taxpayers assume the role of VAT collector free of charge, on behalf of the public authorities).

Moreover, the computation of the margin per journey creates a VAT liability on the total margin generated by all financially profitable trips, without any possibility to offset the “negative margin” generated by the sale of loss-making trips during the same period. Since, according to the TOMS, the expenses are retained inclusive of VAT, and since the operators have no possibility to recover VAT in the Member States where expenses are incurred, VAT incurred on expenses engaged for non-profitable trips becomes a final cost for travel agencies (for the part of the expenses exceeding the selling price of the trip).

This conclusion seems totally opposed to the principle of VAT neutrality, whereas travel operators are fully eligible for the benefit of this principle. Indeed, they carry out an activity giving full right to VAT deduction, even if the recovery of VAT is carried out “basis on basis”, and not “tax on tax”, because of the specific computation methodology inherent to the TOMS.

The liability of the travel operators to the neutrality principle is confirmed by the Court in the Decision Skarpa Travel, as follows:
The interpretation of the provisions of the VAT Directive cannot have the consequence of making it impossible, in practice, to calculate the precise taxable amount laid down specifically in Article 308 of that directive, which presupposes that the travel agent can deduct from the total price, exclusive of VAT, paid by the traveler all of the actual costs which it has incurred for supplies of goods and services provided by other taxable persons, where those transactions are for the direct benefit of the traveler”.

Unfortunately, the practical consequences of the Decision Commission vs. Germany are not in line with this principle.

Finally, the Skarpa Travel Case is part of a series of decisions that will likely create further disorder in a regime that is already very difficult to grasp. The fault is not mainly with the EUCJ: this issue mainly derives from the inadequacy of the provisions of the VAT Directive that the Member States have not been able to amend for more than twenty years. It would not be acceptable – in the light of the key VAT principles – that such lack of reform leads to adverse consequences for the travel operators. In this respect, the provisions currently applicable in France appear to be more in line with the key VAT principles.

Bertrand Jeannin

Bertrand Jeannin, Partner, supplies strategic and technical advice to French and foreign multinational groups in all aspects of their VAT and customs policies. He regularly assists his clients in the […]

Bérenger Richard

Bérenger is attorney-at-law at the Bar of the Hauts-de-Seine. He has 10 years of experience as French VAT, customs and other indirect taxes pracioneer with Deloitte Société d’Avocats. He has […]