Tour Operator Margin Scheme (TOMS)

Tour Operator Margin Scheme (TOMS)

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 account for VAT differently.

So, If you are a business owner in the travel industry who agonises over TOMS, you have come to the right place, because in this article I will try to shed some light on this rather opaque topic. My goal is to give you the assurance that you are heard, understood and helped to properly deal with this scheme.

The Tour Operator Margin Scheme (TOMS) – the black sheep of the VAT family

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 ?

The Tour Operator Margin Scheme (TOMS) is indeed primarily associated with European Union (EU) travel, but its scope extends beyond just EU travel. Initially, the purpose of TOMS was to simplify VAT accounting for tour operators in EU member states. Nevertheless, similar schemes or regulations may exist in other jurisdictions outside the EU.

Even though in countries outside the EU there might be analogous systems or regulations governing the taxation of travel services,  these would have different names and specific requirements tailored to the respective jurisdiction’s tax laws.

The good news is that in many cases TOMS enables VAT to be accounted for on travel supplies without businesses having to register and account for tax in each Member State where the services and goods are enjoyed.

The main purpose that TOMS was introduced in the EU was to help businesses with respect to their VAT obligation. As such, they do not have to pay VAT separately in each different EU member state in which they operate their travel or tour services. UK retained this special VAT scheme 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 only 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 ?

HMRC considers that certain services are always Margin Scheme supplies, for example:

  • accommodation
  • 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, you have to make a very important distinction when you determine whether you have reached the VAT threshold or not.

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  account for VAT differently.

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).

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.

You cannot issue VAT invoices for supplies accounted under the TOMS VAT scheme, 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 accountants make a note 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 accountants perform the end of year TOMS calculation. 

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

 

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