ETOA: Reaction to ECJ Ruling

The European Tour Operators Association (ETOA) has consulted its members on the effects a recent ruling of the European Court of Justice (ECJ) could have on the UK tourism industry.

96% of the UK-based wholesalers who responded reported the new ruling would damage their competitiveness and their ability to sell the UK as a destination, with the consequence that they would be forced to relocate outside the EU.

On the 26th of September last year, the European Court of Justice issued a ruling which overruled the way in which wholesale travel has been taxed in the UK. After allowing time for the industry to evaluate the implications, ETOA surveyed all the major UK-based inbound tour operators and wholesalers on the impact.

The Tour Operators Margin Scheme (TOMS) taxation now has to be applied on business to business transactions. The judgement obliges all wholesalers to reveal their gross margins to their clients and to account for taxation on a transaction-by-transaction basis.

These two measures place an acute competitive and bureaucratic burden on any business caught by the tax.

There is a tax on the company’s gross margin; which a competitor based outside the EU does not pay. They also oblige operators to show their business customers how much margin they are making. One operator said “it not only renders me uncompetitive, it makes me reveal how uncompetitive I am to my customer!” The method of calculation also creates an almost insurmountable clerical difficulty: another stated “It would be impossible for us to calculate our VAT by transaction; this year we will have over 350,000 transactions.”

But even more seriously, the ruling applies VAT to all tourism exports, including any packages in which a UK holiday is sold through a third party and any sale of a European package to a business based in most of the important origin markets, including, China, India and the USA. It makes the UK less competitive, it makes selling the UK less competitive and it makes the UK less competitive as a base for doing tourism business.

The reaction to this by the UK wholesale industry is emphatic. Asked in the consultation how this would affect their competitiveness, they said that it would be extremely detrimental. Their ability to sell the UK would be severely harmed. “We deal with markets which are extremely price sensitive,” said another operator, “like the Student and Indian markets. The Indian market accounts for almost 45% of our business: if we have to increase our prices then they will choose alternative destinations.”

Furthermore, as this tax does not impact businesses based outside the EU, more than 50% of the respondents said they were going to be forced into relocation. Another commented: “The price increases that will be forced upon us simply for being based in the UK will put us at huge disadvantage to non EU operators.” Another stated “we believe it is unlikely that we will be able to continue to trade under our current business model. We stand to lose millions in blocked input VAT….. even before the effect of paying VAT on the margin of all EU supplies is considered. Several of our competitors are based outside the EU; therefore increasing our prices will not be a viable option. ….relocating to outside the EU may be the only choice we have.”

The respondents to ETOA’s consultation have a combined turnover of £2.4 billion and employ more than 2,500 people in the UK.

“The ruling is an attack on the process of adding value to tourism services,” said Tom Jenkins, Chief Executive of ETOA. “It inadvertently delivers a devastating blow to growth businesses working in growth markets. It is hallmarked ‘industrial catastrophe’. But how the ruling is implemented lies in the hands of the government. This taxation scheme (TOMS) is in dire need of reform: one of the shocking aspects of this judgement is that it grants tax free status to foreign holidays, whilst landing a new and substantial tax on our tourism exports. So what is alarming is not just the savagery of what is proposed, but its stupidity. Reform has to be on the agenda before implementation.”

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