TOMS on loss-making travel services

Facts of the case and questions referred

P GmbH organised so-called ‘coffee trips’ within Germany in its own name. Participants were driven to a place of tourist interest and took part in a sales event there. Participants were not obliged to make a purchase. P GmbH commissioned another taxable person to provide the transport and thus received a travel service. The transport was either free of charge for the participants or P GmbH charged a small fee, which, however, did not cover the transport costs. In both cases, the costs of transport were cross-subsidised by the profits from the sale of goods.

The Federal Fiscal Court (BFH), as the referring court, asked whether the transport, insofar as it was provided for a fee, was subject to TOMS under the then Article 26 of the Sixth Directive (now: Article 306 et seq. of the VAT Directive and § 25 of the German VAT Act), and whether this also applied where the taxable margin was negative. If so, the follow-up question would be whether, in the present case, P GmbH would receive a refund due to the excess input VAT and the negative margin.

ECJ ruling

The ECJ first clarified that TOMS applies even where the services in question are supplied in only one Member State, although the difficulties arising from cross-border situations had been a reason for introducing the special scheme. Furthermore, the special scheme is not limited to travel agents or tour operators in the usual sense of the term. As P GmbH had also made use of purchased travel services, the special rule was therefore, in principle, applicable.

The situation might be different if the transport were to be regarded as an ancillary service to the supply of goods. However, as the participants were not obliged to make a purchase, and some of them did not do so, the coach trip clearly had a purpose of its own and was not an ancillary service.

The ECJ then examined whether the lack of input VAT deduction when applying TOMS constituted a breach of VAT neutrality. However, the principle of VAT neutrality is not a rule of primary law, but a principle of interpretation which cannot preclude an explicit derogation such as TOMS.

The inclusion of travel services which systematically generate a negative margin is mandatory; this is due, amongst other things, to the fact that it cannot reasonably be expected of the tax authorities to determine the trader’s intention and the amount of their turnover.

The special rule for travel agencies is therefore applicable in the present case. A refund in the event of a negative margin is out of the question, as the special rule expressly excludes the deduction of input VAT. Otherwise, it could also lead to a situation where one Member State would have to refund another’s input VAT, which is unacceptable.

Analysis

In accordance with the question referred for a preliminary ruling, the ECJ dealt only with the factual scenario in which customers had to pay a small fee for transport, but not with journeys provided free of charge. The Lower Saxony Finance Court (judgement of 12 May 2022, Case No. 5 K 303/14) had already ruled that TOMS did not apply in the latter case and that P GmbH was entitled to claim input VAT deduction on the transport costs in that instance. This was apparently no longer in dispute.

The Advocate General’s Opinion is of particular interest: he called into question the applicability of TOMS to this specific case due to the link to the sale of goods and argued that the special rule served to facilitate a uniform assessment of VAG across Member States. In this instance, however, its application did not simplify matters but rather created problems. He therefore proposed that the TOMS should not be applied in the present case. His opinion was not accepted.

Organisers of such ‘coffee trips’ are advised to check whether waiving payment for the transport service is financially advantageous. In that case, according to the Lower Saxony Finance Court, the special rule for travel agencies would not apply due to the absence of a chargeable travel service, and input VAT deduction may then be considered in accordance with the general principles if the transport costs are directly related to the taxable sales of goods.

Author: Nadia Schulte