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How do you know whether your activity is tax-exempt or taxable? Which system should you apply and to what amount?
In the tourism sector, travel agencies are subject to a specific regime known as the profit margin. The subject has been the subject of much ink and sweat over the past 40 years, and may seem frightening at first glance...
Don't panic! Ezus shares its summaries to give you a better understanding of the subject, which we then used to integrate into our travel production and management software for receptives, tour operators and organizers at all levels.
I. Summary of the VAT topic 🔦
All operators offering travel services are legally referred to as "travel agencies", since the application of the specific tax regime depends on the nature of the service provided, and not on the quality of the service provider 🤔.
These tour operators cannot deduct the value-added tax (VAT) that appears on invoices issued by transport contractors, hoteliers, restaurateurs, entertainment contractors and other service providers supplying the final service to the B2B or B2C customer.
However, it is possible to be exempted from value-added taxes in certain circumstances.
VAT exemption conditions :
- If the company is based outside the European Union
- If the company is based within the European Union, and sells services outside the EU or overseas, or services that have not been performed (cancellations, no-shows, modification fees, insurance).
How the 2 VAT systems work for EU services :
Let's take a look at the two VAT systems applicable to services provided within the European Union. First, the common system.
1. COMMON PLAN (transparent)
This regime applies in several cases, namely if the :
- does not sell transport or accommodation ;
- or directly operates its own vehicles, accommodation, restaurants (see list*).
VAT on purchases, such as that applied to expenses like catering or room hire, is generally recoverable. However, in France, it is generally not recoverable when associated with transport, hotels and car rentals.
In addition, the single service provided by a travel agency is taxable at the standard rate. Other activities carried out by travel agencies and tour operators are subject to their own rates, which may be reduced (rental of tickets for shows, sale of guides, provision of transport, accommodation, etc.).
The sales invoice must display the current VAT rate, to guarantee total transparency.
2. SPECIFIC PLAN (or profit margin)
This scheme only applies to travel packages: you must sell a minimum of accommodation and/or transport in order to qualify.
In this case, only the VAT incurred on the agency's overheads (such as electricity or advertising costs, for example) is recoverable.
VAT on expenses directly related to the trip is unfortunately not recoverable. The VAT payable is calculated on the basis of the all-inclusive margin. The rate applied to this margin depends on the different general VAT rates applicable in the country. For example, the French VAT rate is 20%.
VAT on sales is not (necessarily) displayed.
However, a third scenario exists, in which neither of the two regimes applies...
3. VAT NOT APPLICABLE
The value-added tax regime is not applicable in two cases only, namely if:
- It's air.
- The services are rendered to customers using means of operation owned or leased by the agency (such as the provision of accommodation or passenger transport, sales for consumption on the premises, the rental of camping sites, when the travel agent directly operates the vehicles, hotel establishments, restaurants or grounds)
Note that the 3 scenarios can apply simultaneously on the same file depending on the services. There may even be exempt expenses as well 😰.
II. Calculate VAT margin📊
To calculate the VAT on margin to be paid, here are the main formulas to know:
- Gross Margin = Total Sales Price incl. VAT - Total Purchase Price incl. VAT
- VAT on Margin = Gross Margin * (1-(1/(1+VAT Rate)))
- Net Margin = Gross Margin - VAT on Margin
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III. Good to know about VAT for your travel agency🌟
1. #reduced-rates
1. In France, certain sectors benefit from a reduced VAT rate of 10%, such as rail, air and hotel.
2. Partners' commissions are not taxable, and are therefore added to the travel operator's net margin.
3. VAT on margins invoiced by one travel agency to another is not deductible.
2. #billing
1. In BtoB, agencies are obliged to issue an invoice. In BtoC, a note containing the agency's contact details, those of the customer, the amount including VAT and details of the trip is sufficient.
2. Travel agencies are not obliged to show the amount of VAT on their invoice (so as not to show their margin).
3. Not being obliged to show VAT, the agency may:
- For a French customer, indicate the VAT (on margin) so that the customer can reclaim the VAT.
- For a foreign European customer, make a duty-free invoice (HT) so that the latter pays HT only. It's up to the French agency to register this invoice with the foreign customer's intra-Community VAT number on the tax site. The foreign customer is liable for VAT in his own country. Alternatively, the agency can issue an invoice exclusive of tax + VAT, with the foreign customer paying the VAT.
- For customers outside the European Union, issue an invoice inclusive of VAT. In this case, there is no VAT recovery on French services (territoriality of services consumed in France).
Of course, if the French agency carries out its services outside France, then invoices without VAT = VAT included, as they are not subject to VAT on the margin. It's up to the French agency to pay VAT in France if it buys HT from its European suppliers...
4. The words "Régime particulier - Agence voyages" must appear on every invoice in a french exercise. (CGI, annexe II, art. 242 nonies A, 12°) (15€ fine/bill if omission).
3. #accounting
1. According to the European Court of Justice, VAT on margins must be calculated on a case-by-case basis, whereas French law allows a choice between piecemeal and monthly calculations.
2. Travel agents who simultaneously carry out operations that fall under the specific travel agency regime and operations that do not fall under this regime must constitute separate sectors under the conditions defined by the article 209 of the annexe II of CGI.
3. Tours and cruises carried out in France or the EU are taxable in proportion to the expenses incurred.
Thus : Taxable amount = price of stay x (number of days spent in France and an EU country / total length of stay).
4. Transport services are taxable only for the part of the journey made in France, in the case of rail and road transport. (For example, for a flight outside the EU, the part of the flight between two cities in mainland France is not subject to VAT).
Thus: Taxable amount = price of ticket x (number of kilometers traveled in France / total number of kilometers).
Note that for Corsica, the "mainland-island" segment is exempt from VAT.
IV. Problems with the VAT margin system 🆘
Although many things have changed since 1977 and the introduction of this tax system, it continues to exist, while paradigm shifts have multiplied over the decades (cf. globalization, the Internet, changes in the agent profession...). Travel industry players are still wondering:
Why does my agency margin decrease when selling stays in the EU?
Do receptive operators pay VAT twice?
Can a TO reclaim VAT?
Is it in my interest to have an events business with my agency?
Tour operators cannot deduct VAT on the services they pay for from the cost price of their holiday or trip. In return, he charges VAT only on his margin and not on his total sales price.
Incoming agencies follow the same rules, and many French DMCs deplore having to pay VAT on both sales and purchases.
In short, this system has its limitations because :
- The scheme increases the price of BtoB services by the amount of VAT applicable, and encourages customers to deal directly with hotel or transport service providers in order to retain the benefit of input VAT deduction.
- Its complexity leads to management problems (one of our agency clients overpaid €250,000 in VAT over 5 years), and even prompts some companies to spin off the activities concerned to avoid extending the application of the derogatory system to all the services making up the package sold to customers (e.g. registration for a congress combined with an overnight hotel stay).
V. Influence on the event industry 🥶
This derogation penalizes not only travel agencies, but also event agencies and PCOs (professional congress organizers) providing single services to taxable customers, depriving them of the right to deduct input VAT.
This derogation penalizes BtoB specialists all the more: taxation applies not only to transport and accommodation operations, but also to all operations provided simultaneously.
As a reminder, VAT deduction in the MICE sector is more flexible, particularly for seminars, meetings or events organized by a French events agency in France:
- Organized by yourself : optimized deductibility
- Organized by a travel agency: VAT deductible only on the agency's margin, if indicated on the invoice.
- Organized by an agency under a mandate contract: optimized deductibility.
In addition, expenses for catering, room hire, team-building and overnight stays for external or technical staff are exempt.
VI. Definitions 💁
Provision of services : commercial operation carried out by a travel agency as an intermediary. This means that the service transaction is in the name of the agency, while using goods and services from suppliers (subject to VAT) who are external to it.
Calculation of the tax base : under the specific travel agency regime, the agency's tax-free margin is equal to the difference between the total amount paid by the traveler (revenue) and the cost of purchasing the services borne by the agency (expenses). The VAT rate is calculated on this amount, in contrast to the ordinary law system, where VAT is applied to the selling price to be invoiced to customers.
VAT margin system: applies to the margin made by the travel operator. It applies to the production and distribution of a holiday/tour to the final consumer, whether an individual or a company.
Expenses include the net amount, after deduction of rebates and discounts granted, of sums invoiced to the tour operator by the various service providers who carry out the services rendered to customers (including: reseller commissions, reimbursements and the cost price of information and consultancy services).
🚨 Taxation changes every day... If in doubt, the advice of a tax expert or accountant always prevails!
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Sources :
- Le B.A-BA de la TVA par L'Echo Touristique.
- TVA - Régimes sectoriels - Agences de voyages et organisation de circuits touristiques, article écrit par le Gouvernement Français.
- Guide en ligne pour tout savoir sur la TVA, par Tourmag.
- Pour une liberté de choix entre le régime de la TVA sur la marge et le régime de droit commun par l'UNIMEV.
- Chaîne Youtube sur La TVA de l'agence de Voyage.
- Comment optimiser la récupération de TVA dans l’évènementiel / MICE? , article de Ideal Meetings.
* List of examples: provision of transport, accommodation, sales for consumption on the premises, rental of camping sites, when the travel agent directly operates the vehicles, hotels, restaurants or sites. The same applies to the rental or subletting of tents, caravans, mobile homes or means of transport (motor vehicles, boats) owned or leased by the travel agent.) Also excluded from the special scheme are: the rental of show tickets, foreign exchange transactions, the sale of guides or photographs, and the placement of insurance or assistance contracts.
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