The Tour Operators Margin Scheme (TOMS)
What is the TOMS?
The TOMS is a compulsory VAT accounting simplification measure for any supplier who buys in and resells certain (designated) travel services, as a principal or undisclosed agent, without material alteration. It applies to sales to consumers only and not wholesale B2B sales. Designated travel services are accommodation, passenger transport, trips or excursions, hire of a means of transport and the use of airport lounges or tour guides.
It can apply to the sale of a single designated travel service as well as a package. Some other types of supply, theatre/attraction/sports event tickets and catering will be in the TOMS if these are sold with a designated travel service. It also applies to any business or organisation selling designated travel services and not just tour operators and travel agents.
VAT is payable where the supplier is established (so a UK supplier will account for UK VAT) rather than where the service is consumed. Otherwise, under the normal EU VAT rules, suppliers could have a liability to register and account for VAT in each EU member state where any travel service is consumed.
VAT is due on the Margin (the difference between the selling price and the cost of the relevant travel service). Standard rated VAT is due on services consumed in the EU and zero rated VAT applies to services consumed outside the EU. Suppliers established outside the EU will not be liable to pay any EU VAT even if the customer is in the EU and the service is consumed in the EU (although this is subject to ongoing review by the EU Commission).
The TOMS VAT liability is calculated on an annual financial year basis but suppliers are required to pay an estimated (provisional) amount of anticipated VAT during the financial year itself.
A concession applies to supplier’s sales of designated travel services which are, or are anticipated to be less than 1% of the total business turnover in the year. However, this does not apply if the sales are of accommodation or passenger transport.
VAT invoices must be issued for supplies (liable to the TOMS) to business customers (i.e. for business travel). However, instead of recording the amount of VAT due, the supplier must state that “the supplies are subject to the Tour Operators Margin Scheme” or words to that effect. As a result, business customers will not be able to recover any VAT included in the price.
What is not in the TOMS?
As noted above, the TOMS is not applicable to wholesale sales (B2B for onward supply by the buyer). Instead any VAT is due under the normal EU VAT place of supply rules and the supplier could be liable to register and account for VAT elsewhere in the EU (if the service is deemed to be subject to VAT in another EU Member State).
In addition, the services of a wholly disclosed agent, who is selling on behalf of another named travel service supplier, will not be liable to the TOMS. The supply by the travel service supplier may be. However, the agent’s services will be liable to VAT under the normal VAT rules, including any booking admin and credit/debit card fees charged to the consumer, as well as commission charged/due from the supplier.
Supplies from own assets or where there is a material alteration are also not liable to VAT under the TOMS. These are called in-house supplies. This includes supplies of hotel accommodation by hotel owners and supplies of flights by an airline, as well as conferences or events created by the organiser. Material alteration can include where a tour operator charters an aircraft for a season, or leases a hotel, and then contracts with a separate supplier for catering, crew or staff etc. These will then become supplies of passenger transport or hotel accommodation. As with wholesale supplies, any VAT is due under the normal EU VAT place of supply rules and the supplier could be liable to register and account for VAT elsewhere in the EU (if the service is deemed to be subject to VAT in another EU Member State). Where the supply is treated as taking place in the UK, VAT may be due at either the standard rate (i.e. hotel accommodation) or the zero rate (passenger transport).
Where a supplier sells a single price package made up of both a TOMS and an in-house supply, special rules apply to the TOMS calculation. The value used to calculate the proportion of the price for the in-house part or parts (where any VAT is then due under the normal rules) is the Open Market Value based on what the price would be if that part was sold on its own. If it would not be sold on its own then a value can be calculated through the cost apportionment process applied by the standard TOMS calculation method.
Mitigating any UK VAT payable under TOMS
The standard TOMS calculation method is the Global method where both EU and non-EU sales and costs are recorded through a single calculation. Where the actual margin on the EU sales is greater than on non-EU sales, part of the EU margin will be treated as non-EU part when calculating the VAT due. Where it is the other way around, then a split calculation method can limit any VAT payable on the EU margin only.
Under the TOMS, the margin on any EU passenger transport element will be subject to standard rated UK VAT. However, there are three ways of structuring the sales so that UK zero rating can apply. The most commonly used is the Transport Company Option (using a subsidiary to buy in and wholesale the passenger transport to the tour operator). However, there are two others, the Agency Option (being a disclosed agent) and the Charter Option (creating an in-house supply by chartering an aircraft/leasing a coach and contracting separately for staff/maintenance/catering etc).
Lastly, as noted above, if a supply of travel services otherwise liable to TOMS in the EU is made by a supplier established outside of the EU, this will be taxed by reference to where the supplier is established. Therefore, unless the country of establishment outside the EU requires VAT to be paid on supplies in the EU the sales will not be subject to VAT.
Please do not hesitate to contact Rajeev Shaunak to discuss any of the above and how this might apply to your business in greater detail.