Hotel, hospitality and leisure businesses may expect new value added tax (‘VAT’) rules coming their way in the European Union. Developments like the VAT in the Digital Age proposals, the travel and tourism VAT rules review, as well as new case-law and tax authority guidance for travel agents, are important for the industry.

1. VAT in the Digital Age

The European Commission announced significant reforms to the EU VAT system on December 8, 2022. The reforms are part of its VAT in the Digital Age initiative (ViDA), which aims to combat EU VAT revenue loss and to modernize the EU VAT system by making it simpler, more efficient and fit for the digital age. The reforms introduce (1) new e-invoicing and digital reporting requirements, (2) platform economy updates and (3) e-commerce and international trade changes. Once enacted, the reforms are expected to go live in multiple annual waves starting 1 January 2024.

The main changes for hotel, hospitality and leisure businesses are the platform economy updates, which amongst others introduce new deemed seller rules for short-term accommodation platforms and passenger transport platforms. These changes are on the horizon for 1 January 2025.

It is proposed that platforms in these sectors need to collect and remit VAT on covered sales if the underlying seller does not, for example, if the underlying seller is a consumer or subject to a small business scheme. With these new rules, EU VAT policymakers aim to create a level-playing-field, assuring that VAT is due and paid on sales regardless of the type of accommodation being booked.

Andy van Esdonk, Head of VAT Netherlands at Bird & Bird, says: “Short-term accommodation platforms and passenger transport platforms need to consider how these changes impact their business models, operational processes, such as seller guidance and pricing. This may include implementation of policies and controls to manage multiple VAT regimes and VAT record keeping requirements in parallel.”

2. Travel and tourism VAT rules

The EU VAT system includes multiple travel and tourism VAT rules, such as the special scheme for travel agents, passenger transport and tax-free shopping. EU VAT policymakers are considering updating these rules, both to modernize taxation and to address the impact of the pandemic for the EU’s travel and tourism economy.

The special scheme for travel agents or tour operators margin scheme (TOMS) was introduced in the 1970’s and has not changed since. With changing business models due to technology and EU Member States applying TOMS differently, significant reforms are thought to be necessary.

Furthermore, the passenger transport rules are considered complex to apply, with taxation for example being dependent on places of departure, arrival, countries crossed, as well as road, sea or air travel. The current policy alternatives to be discussed include a VAT zero rate for all international transport services in the EU.

Similar to the above, tax-free shopping rules are not consistently applied across the EU Member States and go hand in hand with red tape for both non-EU visitors and EU based retail businesses. This includes filing VAT refund requests and substantiating with data and documentation that goods were exported from the EU to a non-EU country within certain timeframes. A proposed policy alternative is for retailers to apply a VAT zero rate, provided they obtained a secure and unique identifier from a tax-free shopping partner.

Giuliana Polacco, Tax Disputes Partner at Bird & Bird Italy, comments: “There is a high need to harmonize and update the travel and tourism VAT rules in the EU, since domestic rules are clearly outdated and do not align with the evolving landscape of the travel industry, particularly the many unclarities surrounding TOMS have triggered tax authority audits and tax litigation procedures across the EU Member States.”

3. Case-law and tax authority guidance

In the Polish “C. sp. z o.o.” case released on 29 June 2023, the Court of Justice of the European Union (CJEU) ruled that the purchase and resale of hotel accommodation services is subject to TOMS. The Polish tax authorities had argued TOMS did not apply, because a mere resale of accommodation in their view did not constitute a complex tourist service subject to the TOMS scheme. This ruling aligns with the CJEU 2018 ruling in the “Alpenchalets Resorts” case. Tax authority guidance in the Netherlands for example, was updated accordingly to reflect this change.