Is “Forum Shopping” becoming unacceptable? How does this fit with changes to the Package Travel Directive?

posted in: Uncategorized | 0

In the past few years, the issue of companies paying their fair share of tax in the countries where they have earned their income has become an increasing topic for debate – with active campaigns against Starbucks, Amazon and many others who have chosen to locate their businesses in low tax areas to minimise their tax obligations. This practice has increasingly been questioned by the media, campaigners and politicians, who believe that businesses should abide by their obligations in whichever country they choose to trade.


It has been interesting to me to watch the extent to which politicians are trying to blur the distinction between Tax Evasion – an illegal attempt to avoid paying the tax which is due and Tax Avoidance – the legal structuring of your affairs to minimise your tax liabilities. The English legal system is littered with cases over the past 100 years or more where governments have unsuccessfully challenged avoidance schemes in the courts, and after losing the cases, have introduced legislation to prevent particular avoidance schemes. It seems to me that a lot of other taxpayers’ money could have been saved by simply introducing the legislation in the first place, but that is a side issue.


As I write this piece, this topic is in the news again, with the House of Commons Public Accounts Committee criticising one of the large accountancy practices for “the promotion of tax avoidance on an industrial scale”.


The interesting challenge for businesses is that Directors have a duty to their shareholders to promote the long term success of the business, which effectively means that they should maximise the return to those shareholders. The Companies Act 2006 qualifies and contextualises this obligation in the UIK, and also imposes obligations on Directors to take account of:

  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct


These obligations give a level of balance, but it is easy to see why companies argue that they need to minimise their outgoings, including their tax and other costs.


One of the fundamental freedoms enshrined in the EU Treaties is the Freedom of Establishment. On the EU website, this is defined as:

The principle of freedom of establishment enables an economic operator (whether a person or a company) to carry on an economic activity in a stable and continuous way in one or more Member States.


As such, there is a legal right for any EU business to place its HQ in any EU member state and trade from that country. It is this right on which those so called tax avoiders rely when choosing to establish their businesses in a low tax regime. Whilst potentially EU member states could limit the impacts of this freedom by introducing some form of mutual tax and regulatory arrangements to prevent businesses gaining a fiscal or regulatory advantage by their place of establishment, such a measure has always fallen into the “too difficult” box by EU member states, and has therefore never happened.

This topic has always affected the travel industry, as we tend to sell holidays in one or more countries, for delivery in other countries. Due to the regulatory regimes in place, tour operators, in particular, have typically ended up with multiple places of establishment with a need to comply with the regulatory and tax regimes of each of those countries. In relation to tax, in theory, that should not be a problem as the VAT Tour Operators Margin Scheme (TOMS) is theoretically an EU wide tax simplification measure. However, as TOMS has been implemented in different ways in almost every EU member state, there is in practice little real simplification.


As a result, the proposals in the draft Package Travel Directive are of real interest to businesses selling in more than one EU member state. The new Article 16 provides for mutual recognition of insolvency protection schemes. As such, a travel business can have a place of establishment in, say, one of the Baltic states and comply with their financial protection scheme arrangements whilst selling holidays elsewhere in the EU – like the UK. Where that then leaves financial protection schemes which are effectively mutual schemes – where the costs of failure of one travel business are effectively supported by other businesses in that market – which is how the ATOL scheme works, as do the schemes in Belgium and the Netherlands, amongst others, is going to be an interesting question.


We have already seen one significant example of this in practice, when relocated from Gatwick to Mallorca.


As a result, when the Package Travel Directive becomes law – probably 2017 or 2018, travel businesses will be able to choose their place of establishment, and will need to make a choice as to whether they move to a country with a lower cost of financial protection. Whilst this seems to fly in the face of all the political and moral pressure currently being exerted on businesses to meet their obligations, the right is being created for a reason, and in the expectation that businesses will consider the benefits of relocation.


In the short term, one of the biggest challenges that travel businesses will face is trying to understand the benefits to be gained by relocation. As it stands, there is little transparency about the costs and impacts of the financial protection schemes which exist in different member states across the EU. At present, a travel business has no way of calculating the cost of financial protection for its existing business in, say, Latvia or Slovakia, compared to the cost of compliance with the ATOL scheme in the UK. We will all have to learn the differences, or at least those who advise travel businesses will need to determine this information. It then becomes a conscious business decision as to whether there are benefits in relocating to lower cost countries.


At the same time, this process of Forum Shopping, despite being specifically authorised, if not encouraged by the changes in the Package Travel Directive may become the subject of the same sort of approbation that is currently reserved for tax forum shoppers. Equally, what will happen at the point of the first significant failure of a travel business established in a different country? If the affected consumers experience major difficulty particularly in relation to repatriation, we can almost write the newspaper headlines now.


Whatever happens, the topic of forum shopping is going to be something of ever greater interest to the travel industry, and certainly one which businesses are going to need clear and simple advice on how they should respond.