Pass-Through Agent vs. Merchant of Record vs. Bill-Back: How Your TMC Model Determines EU VAT Reclaim

Every hotel booking in France carries 10% VAT. Every rail ticket in Germany carries 7% or 19%. Every conference venue in Belgium carries 21%. For companies with significant European travel spend, the reclaimable VAT can run into six figures annually. Yet many finance teams never recover that money because their TMC’s commercial model structurally prevents reclaim before anyone thinks to ask.

This article explains the three TMC commercial models, their VAT implications, and how to evaluate your current arrangement.

Why does your TMC’s commercial model affect VAT reclaim?

EU Value Added Tax (VAT) is charged on most goods and services at rates ranging from 7% to 27% depending on the member state and category.[1] When a company purchases travel services (hotels, rail, ground transport) for business purposes, that VAT is theoretically recoverable as input tax. The mechanism is straightforward: the company receives a valid tax invoice from the supplier with the supplier’s VAT number in the seller field and the company’s VAT number in the buyer field, then claims the input VAT through its periodic VAT return.

The critical question is: Who is the legal seller of the travel service?

If the supplier (hotel, airline, rail operator) is the legal seller and invoices the company directly, input VAT recovery works. If the TMC has interposed itself as the legal seller, the supplier never “saw” the company, and the invoicing chain that enables recovery breaks.

This isn’t a documentation problem. It isn’t solved by better expense tools or faster receipt collection. It’s a structural question determined by the contractual model your TMC operates under.

The financial stakes

Consider a company spending EUR 5 million annually on European travel. Hotel stays in France (10% VAT), Germany (19% VAT), and Belgium (21% VAT) represent the largest VAT-carrying categories. Depending on the travel mix, the reclaimable input VAT could range from EUR 400,000 to EUR 750,000 annually. Whether that money flows back to the company or disappears into the TMC’s commercial structure depends entirely on one decision: the TMC’s operating model.

What are the three TMC commercial models?

Three commercial models dominate the TMC industry. Each creates a fundamentally different legal relationship between the company, the TMC, and the travel supplier.

Model 1: Agent pass-through (disclosed agent)

In a pass-through arrangement, the TMC arranges the booking and handles logistics, but the client pays the supplier directly (often via a virtual card issued in the client’s name). The supplier sees the client as the buyer. The resulting invoice is addressed to the client, with the supplier’s VAT number in the seller field and the client’s VAT number in the buyer field.

VAT treatment: Standard input VAT recovery applies. The company files the invoice in its periodic VAT return and reclaims the input tax through the normal mechanism.[2] The TMC earns revenue through a separate service fee, invoiced directly to the client as a standard B2B transaction. This fee is also VAT-recoverable as a business service.

Model 2: Agent bill-back

In a bill-back arrangement, the TMC pays the supplier using its own funds and later recharges the client. The supplier only ever sees the TMC. The invoice is addressed to the TMC (not the client). The client’s VAT number never appears on the supplier’s documentation.

VAT treatment: The invoicing chain is broken. The supplier invoiced the TMC, creating a supply from supplier to TMC. The TMC then creates a separate supply from TMC to client. For the underlying foreign VAT, the recovery mechanism requires an invoice naming the company as buyer in the supplier’s country, which doesn’t exist.[3]

Model 3: Reseller / principal (Tour Operators’ Margin Scheme)

In a reseller model, the TMC buys travel inventory from suppliers and resells it to the client. The TMC is the legal seller. EU VAT law treats this as a “designated travel service” under the Tour Operators’ Margin Scheme (TOMS), governed by Articles 306–310 of the EU VAT Directive (2006/112/EC).[4]

VAT treatment: Under TOMS, only the TMC’s margin is subject to VAT. The buyer cannot reclaim input VAT on the TMC’s invoice because TOMS explicitly prevents it. The underlying supplier VAT is consumed inside the margin scheme.

The Association of British Travel Agents (ABTA) explains: “If the TMC etc. acts as an undisclosed agent, it may be liable to account for VAT under TOMS and, when a TOMS supply is made to a business, the VAT invoice has to include a reference confirming that TOMS has been applied. However, it must not show a separate amount of TOMS VAT nor the VAT charged by the underlying principal, preventing the corporate customer from being able to reclaim any of the VAT.”[5]

Comparison: three TMC models at a glance

What is the Tour Operators’ Margin Scheme and how does it affect corporate travel?

TOMS is a special VAT regime originally designed to simplify cross-border VAT for package holiday providers. Without it, a tour operator selling a package containing flights (taxed at origin), hotels (taxed at destination), and transfers (taxed in transit) would need VAT registrations in every member state where services are consumed.[6]

TOMS solves this by allowing the operator to account for VAT only on the margin (the difference between what they charge the customer and what they paid suppliers). The catch: input VAT on the underlying travel services is irrecoverable.

Why corporate travel gets caught

TOMS doesn’t apply only to leisure holiday packages. Tax advisory firm Ryan explains: “TOMS is a special VAT accounting scheme designed to be applicable to businesses that purchase and resell travel services as part of a tour package.” In practice, this captures business travel, incentive travel, and conferences whenever the TMC operates as a principal rather than a disclosed agent.[7]

TOMS specialist Martin Pooley notes: “Business travel, incentive travel, and conferences are often caught by TOMS. This is a serious problem: the operator cannot reclaim input tax and cannot give the customer a VAT invoice so the customer cannot reclaim VAT.”[8]

The “consolidated invoice” trap

When a TMC offers a single monthly invoice covering all travel bookings, this signals a reseller or principal model. The convenience of one document comes at a structural cost: every booking inside that consolidated invoice is treated as a TOMS supply, and the VAT on each underlying service becomes permanently locked.

• One neat invoice per month: convenient for accounts payable
• Every booking under TOMS: no VAT reclaim on any of them
• EU standard VAT rates (10–25%): applied to hotels, venues, and ground transport

The trade-off between administrative convenience and VAT recovery is rarely made explicit during TMC procurement.

How do e-invoicing mandates make your TMC’s model more critical?

EU member states are implementing mandatory e-invoicing (structured XML transmitted through regulated channels, not PDF). Under a live mandate, only the legal seller can issue the compliant e-invoice.[9]

This creates a direct link between your TMC’s commercial model and e-invoicing compliance:

• If TMC is a disclosed agent: The supplier is the legal seller. The supplier issues the e-invoice directly to your company through the regulated channel. Your entity appears as a buyer. VAT reclaim rights are preserved.
• If TMC is a merchant of record: The TMC is the legal seller. The e-invoice flows from TMC to your company under TOMS. No separate VAT line item appears. No reclaim is possible.

Countries with live or imminent mandates

As these mandates go live, the TMC’s commercial model stops being a theoretical tax consideration and becomes an operational blocker. A company whose TMC operates as a merchant of record in France will structurally be unable to receive a compliant e-invoice that supports VAT reclaim, regardless of how sophisticated their expense management tools are.

Read our guide: What is e-invoicing?

How to evaluate your TMC’s commercial model for VAT reclaim

Finance and procurement teams can audit their TMC arrangement with five questions:

• “In which countries do you operate as a disclosed agent?” A TMC may use different models in different markets. Get country-level specificity.
• “Do supplier invoices name our company as the buyer?” If the supplier’s invoice names the TMC, the pass-through model isn’t in place regardless of what the contract says.
• “Do you issue consolidated invoices that include underlying travel costs?” A consolidated invoice covering hotel stays, flights, and rail signals a principal/reseller model.
• “What is your VAT treatment for bookings in [specific EU countries]?” Ask about the countries where your company has the highest travel spend.
• “Can you confirm in writing that TOMS does not apply to services you provide to us?” This question forces clarity on the contractual structure.

Red flags in your current arrangement

• Monthly consolidated invoices covering all travel categories from the TMC
• No supplier-addressed invoices reaching your finance team
• TMC invoices that reference “margin scheme” or include TOMS disclosures
• Inability to reclaim foreign VAT despite significant EU travel spend
• TMC resistance to providing country-by-country model clarification

Navan operates as an agent pass-through across all markets. The supplier always invoices the client directly. Navan’s commercial model preserves VAT reclaim rights structurally, meaning the client’s VAT number appears on every supplier invoice and the standard input VAT recovery mechanism applies. For bookings where Navan is authorized to issue on the supplier’s behalf, the e-invoice still names the client as buyer.

For a deeper look at VAT reclaim challenges for corporate travel, including how automation can help recover money already left on the table, Navan’s partnership with VAT IT addresses the operational side of reclaim once the structural model is in place.

Read more: Travel document types for finance

Protect your EU VAT recovery when choosing a travel management partner

The TMC commercial model is the one structural decision in your travel program that determines whether EU VAT flows back to your company or disappears permanently. Unlike rate negotiations, policy optimization, or traveler adoption improvements, this isn’t a marginal efficiency gain: it’s a binary structural outcome affecting 10–25% of your European travel spend.

Before your next TMC contract renewal or RFP, add the five evaluation questions above to your procurement framework. The answer will tell you more about your VAT recovery prospects than any savings percentage in a slide deck.

Ready to ensure your travel program preserves full EU VAT recovery? Talk to the Navan team about how the agent pass-through model works in practice.

Sources

• European Commission, “VAT Rates Applied in the Member States of the European Union,” 2026
• European Commission, “VAT Deductions (Input Tax),” 2026
• ABTA, “VAT, TOMS and Agents,” 2024
• European Council, “EU VAT Directive 2006/112/EC, Articles 306-310,” 2006
• ABTA, “VAT, TOMS and Agents,” 2024
• Ryan, “FAQs: Tour Operators Margin Scheme (TOMS) and VAT,” 2025
• Ryan, “FAQs: Tour Operators Margin Scheme (TOMS) and VAT,” 2025
• Martin Pooley, “TOMS VAT - Tour Operator Margin Scheme Guide,” 2025
• VATit, “Disclosed vs Undisclosed VAT Agents: What’s the Difference?,” 2025