If you are a business owner in the travel industry who agonises over TOMS, you have come to the right place, because in this blog I will try to shed some light on this rather opaque topic with the goal to give you the assurance that you are heard, understood and helped to properly deal with this scheme.
The Tour Operator Margin Scheme (TOMS) is specific to the travel industry, as its name gives it out. It is a way in which businesses that buy and re-sell travel, accommodation and other services can account for VAT without losing their profit.
This is because if you are registered for VAT, you must normally account for VAT on the full selling price of your supplies. However, as a tour operator based in the UK, you only account for VAT on the margin you make on your margin scheme supplies.
Many businesses in the travel industry and even many accountants perceive the Tour Operator Margin Scheme (TOMS) VAT calculation as a scary giant. As with any scary giant, the reasonable course of action would be to run away. However, this may not be an option, since the ever-vigilant eye of HMRC will eventually catch up with you. So if you are having sleepless nights about TOMS, I can totally understand your pain. The good news is that in most cases, TOMS is rather straightforward. In the following, I will attempt to clarify the main features of this scheme.
The Tour Operator Margin Scheme (TOMS), as mentioned earlier, applies to UK businesses that buy and resell travel, accommodation and certain other holiday services as principal (i.e. travel agent or tour operator) or undisclosed agent (i.e. agent who is acting in his own name). The Tour Operator Margin Scheme (TOMS) is a VAT simplification method that treats a bundle of supplies made to the same traveller as a single supply made in the UK.
Does TOMS apply only to EU travel ?
TOMS was introduced in the EU for the main purpose of helping businesses with respect to their VAT obligation in that they do not have to pay VAT separately in each different EU member state in which they operate their travel or tour services. It has been retained by the UK after Brexit, such that from 1 JAN 2021 UK businesses that qualify for TOMS can continue to use it.
Where TOMS applies, input VAT (i.e. VAT included in the price of products and services you buy) is irrecoverable on direct costs, while output VAT (i.e. VAT that is included in the price you charge your customers) is payable on the margin made.
It is important to note that TOMS applies to sales to consumers (i.e. travellers) and not to wholesale business-to-business sales.
Businesses to which TOMS applies
Despite the “tour operator” in the title, this scheme does not apply necessarily to businesses that consider themselves tour operators. Rather it applies to all businesses that fall under the criteria detailed below.
As mentioned earlier, TOMS applies to businesses that buy in and resell travel, accommodation and certain other services as a principal (i.e. travel agent or tour operator) or undisclosed agent (i.e. acting in your own name). This applies even though these services are not the main activities of the business, for example:
- hotelier who buys in coach passenger transport to collect its guests at the start and end of their stay
- coach operator who buys in hotel accommodation in order to put together a package
- company that arranges conferences, including providing hotel accommodation for delegates
As such, a business must use TOMS when it acts as an undisclosed agent (that is, an agent acting in his own name) or a principal (i.e. travel agent or tour operator) in making either:
- Margin Scheme supplies, or
- other types of supply (for example an in-house supply) packaged or supplied with Margin Scheme supplies
What is the Margin Scheme ?
The types of services that are always considered Margin Scheme supplies by HMRC are the following:
- passenger transport
- hire of a means of transport
- trips or excursions
- services of tour guides
- use of special lounges at airports
Supplies such as catering, admission tickets and sports facilities fall within this category if they are:
- bought in and sold on without material alteration, for the direct benefit of a traveller
- provided as part of a package with one or more of the supplies listed in the list above
It is important to note that TOMS does not apply to:
- supplies you have arranged as a disclosed agent or intermediary and your commission is readily identifiable
- in-house or agency supplies you make which are not packaged or supplied with Margin Scheme supplies
- supplies you make to business customers for subsequent resale by them (that is, wholesale supplies)
- supplies that are incidental to your other supplies
How TOMS works
As mentioned eralier, a very important distinction is made when it comes to what determines the VAT threshold. This is because if you are registered for VAT, you must normally account for VAT on the full selling price of your supplies. However, as a tour operator based in the UK, you only account for VAT on the margin you make on your margin scheme supplies.
Under the Tour Operator Margin Scheme (TOMS), you cannot reclaim any VAT charged on the travel services and goods you buy in and resupply, because the tax on such goods or services is accounted for in the relevant EU member state by the providers of those services (hotels, airlines and so on).
As a tour operator based in the UK, you only account for VAT on the difference between the amount you receive from your customer (including any amounts paid on behalf of your customer by third parties) and the amount you pay your suppliers. This is the margin you make on your Margin Scheme supplies.
The TOMS VAT liability is calculated on an annual financial year basis, however businesses are required to pay an estimated (provisional) amount of anticipated VAT during the financial year itself.
VAT invoices cannot be issued for supplies accounted under the TOMS, because the amount of output tax charged on the services supplied is not usually known at the time the supply is made. This is why a note is made on the invoice such as “supplied under TOMS”. Under the Tour Operator Margin Scheme (TOMS), the VAT can only be determined following the end of your financial year when the end of year TOMS calculation can be performed.
How can LAS Accounting help ?
Managing TOMS can be challenging, but it is not something that you should worry about. By getting the support of an expert accountant, you have the best chance of navigating the complexities of this scheme and take care of your financial health.
If you would like to talk to me about how I work with travel businesses like you please get in touch.
by Laura Sterian
LAS Accounting Ltd