Value Added Tax (VAT) can be a complex area for businesses in the travel and tourism sector. The unique nature of buying and reselling services across multiple jurisdictions, where the VAT rules of each country could otherwise apply, presents significant administrative challenges. This landscape was further complicated by post-Brexit changes, which altered cross-border VAT on International transactions. To simplify this process, the UK operates a special scheme known as the Tour Operators Margin Scheme (TOMS).
TOMS fundamentally changes how tour operators account for VAT, moving the point of tax from the individual components of a holiday to the profit margin made on the entire package. Understanding whether your business must use TOMS, how it operates, and how to remain compliant is crucial to avoiding unexpected VAT liabilities and penalties.
This guide provides a comprehensive overview of the UK’s Tour Operators Margin Scheme, how it works, who must use TOMS and how to calculate TOMS to ensure your business remains compliant.
Table of Contents
What is the Tour Operators Margin Scheme (TOMS)?
The Tour Operators Margin Scheme (TOMS) is a mandatory, special VAT scheme for businesses that buy in and resell travel facilities as a principal or as an undisclosed agent (tour operator). First introduced by the European Union in 1977, the scheme has seen numerous adjustments, most notably following the UK’s withdrawal from the EU. The UK continues to operate its own version of TOMS, which remains broadly aligned with the principles of the EU model but is now governed by domestic UK law.
TOMS is designed as a simplification measure to handle the complexities of applying standard VAT to cross-border travel services. Under standard VAT rules, a UK business supplying services in another country might have to register for VAT in each country in which it operates. TOMS avoids this by treating a bundle of supplies made to the same traveller as a single supply made in the UK, where the business is established. The scheme then requires VAT to be accounted for only on the profit margin achieved on that supply, rather than on its full selling price.
As outlined in HMRC’s VAT Notice 709/5, the law governing the UK’s TOMS is found in the Value Added Tax Act 1994 and the Value Added Tax (Tour Operators) Order 1987. It is a compulsory scheme for those who meet the criteria; a business cannot choose whether or not to opt in.
How Does TOMS Work?
The Tour Operators Margin Scheme calculates VAT on the profit margin made from a travel package, rather than on its full selling price. The margin is the difference between the total amount a customer pays and the direct cost of the bought-in services that comprise the holiday. UK VAT tax is then appropriately charged on this margin.
This margin-based approach has immediate practical consequences for businesses within the travel sector. As VAT is not being charged on the individual components of the package, a standard VAT invoice cannot be issued. Instead, the invoice provided to customers should not show VAT as a separate line item, as VAT is only calculated based on the final profit margin.
One fundamental shift from standard VAT accounting is that VAT cannot be reclaimed on travel services purchased for resale. For instance, a hotel and transfer package, purchased and resold by a travel agent in the UK, cannot reclaim any VAT from the point of purchase, as the VAT has ultimately been accounted for by the providers in the host countries. These VAT restrictions only apply to resold travel components. It is still possible for businesses to reclaim VAT on business expenses, such as office supplies, marketing costs, and professional fees, as well as any supplies a business makes that fall outside of the TOMS scheme.
How Does TOMS VAT Differ from Standard VAT?
The differences between TOMS and standard VAT are significant. The table below highlights these key distinctions:
| Feature | Standard VAT | Tour Operators Margin Scheme (TOMS) |
|---|---|---|
| Tax Base | VAT is charged on the final sale price. | VAT is charged only on the profit margin (selling price less cost of bought-in services). |
| Input VAT Recovery | VAT on purchases can be reclaimed, subject to standard HMRC VAT rules. | VAT on bought-in travel services that are resold cannot be reclaimed. |
| Place of Supply | Varies depending on the service. For businesses to serve customers, this is where the supplier operates. | The single supply of a travel package is generally treated as supplied where the tour is taking place. |
| VAT Invoicing | A standard VAT invoice must be issued, showing the VAT charged. | You cannot issue a standard VAT invoice for a TOMS supply. |
| Scope | Applies to most business activities, with some products and services receiving reduced or zero VAT tax rates. | Mandatory for businesses that buy in and resell travel services as a principal or undisclosed agent. |
It is crucial to accurately calculate your VAT returns, as an incorrect submission can result in substantial fines and penalties. At DS Burge & Co, our team of VAT accountants can help you establish the correct VAT for your business, ensuring that you take advantage of the TOMS VAT benefits.
Who Must Use TOMS?
The Tour Operator Margin Scheme must be used by any undisclosed agent or travel principal selling travel supplies that operate cross-border. The term “tour operator” for TOMS includes a broad range of businesses, but typically, the following must use the scheme:
- Travel agents acting as principals: When you sell travel services in your own name, not as a disclosed intermediary for the provider.
- Tour operators: Traditional businesses that create and sell holiday packages.
- Travel organisers: Companies that put together and sell travel itineraries.
- Event organisers providing travel packages: This could include a company that arranges conferences and provides hotel accommodation for delegates.
- Other atypical businesses: For instance, a hotelier that buys in coach transport for guests, or a coach operator that buys in hotel accommodation to create a package.
There have been numerous tribunal cases involving businesses arguing their case against being included under TOMS, such as serviced apartment operators and on-demand transport services, including Bolt. Any businesses that meet the criteria of buying in and resupplying travel services cross-border are likely to have to adhere to the TOMS VAT scheme.
The VAT registration threshold for a business operating under the Tour Operators Margin Scheme (TOMS) is determined not by the total sales turnover, but by its taxable turnover.
HMRC precisely defines this figure as the aggregate of the total profit margin on Margin Scheme supplies and the full value of any associated taxable supplies, such as in-house services and taxable agency commission.
When Does TOMS Not Apply?
There are clear circumstances where TOMS does not apply. You are not acting as a tour operator for TOMS purposes in the following situations:
- Businesses acting purely as disclosed agents: If you act as a disclosed agent (a third party or broker) and your commission or fee is readily identifiable, you are not making a margin on the supply. You must account for VAT on your commission under the normal HMRC VAT rules.
- Supplies not packaged with Margin Scheme supplies: In-house supplies or agency supplies that you make, which are not packaged or supplied together with Margin Scheme supplies, fall outside of TOMS and are taxed under normal VAT rules.
- Incidental supplies: Supplies that are incidental to your other supplies are excluded from the scheme.
What Supplies are Covered by TOMS?
TOMS covers a broad range of supplies, identifiable under “designated travel services” or “Margin Scheme supplies.” These are goods or services bought in from another individual and resupplied without material alteration or further processing, for the direct benefit of a traveller.
The following supplies are generally always included as margin scheme supplies:
- Accommodation: Including hotels, villas, or holiday rentals, but can also include self-service apartments.
- Passenger transport: Such as flights, rail, coach, or ferry services included in a package.
- Transport Hire: Car rental or bike and boat hire included as part of a travel package.
- Trips or excursions: Guided tours or sightseeing trips.
- Tour guides
- Use of private airport lounges
Certain other services may also be treated as margin scheme supplies when they are supplied as part of a package with one or more of the supplies listed above and meet the same conditions. These include:
- Catering or meals: When included as part of the travel package. Such as all-inclusive packages or lunch included as part of a tour.
- Use of sports or leisure facilities: Can include golf courses, spas, or ski passes.
- Admission tickets: For example, theatre tickets, museums, or attractions.
It is crucial to note that for a supply to fall within the UK TOMS, the service must be supplied from a UK establishment for the benefit of a traveller. The scheme covers travel services enjoyed both within and outside the UK.
Real Life TOMS Example
Imagine a UK tour operator selling a package holiday to Inverness for 1 week, with a total price of £1,500 to a customer. The package includes flights, coach transfer and hotel as part of the total price. The tour operator buys the flight seats from an airline for £300, pays £100 to a local coach company for transfers and books the hotel accommodation for £600, including VAT. These are ‘bought-in’ services, resulting in the total cost of £1,000.
The tour operator’s margin is £500 (£1,500 sale price-£1,000 cost of supply).
Of which £600 is a standard-rated supply and £400 is zero-rated, indicating that 60% of the costs are standard-rated.
£500 * 60% = £300 (margin related to standard-rated supplies)
£300 / 6 = £50 owed to HMRC.
If the tour were to happen overseas (let’s say Spain), this would be zero-rated; therefore, nothing would be owed to HMRC.
TOMS Calculation and Reporting
Calculating and reporting VAT under TOMS involves specific methods and a year-end adjustment process. The following needs to be considered when calculating and reporting TOMS for HMRC:
- Calculating the Margin: The amount taxable under TOMS is the profit margin you make on your margin scheme supplies, not on the full value charged to the customer. This is the difference between the total amount you receive from your customers and the amount you pay your suppliers for the supplies you have purchased.
- Handling UK vs. Non-UK Supplies Post-Brexit: After Brexit, the UK maintains its own version of TOMS. For a UK-established tour operator, the margin on travel services enjoyed outside the UK is zero-rated. The margin on services enjoyed within the UK is subject to UK VAT at the standard rate. To calculate the correct amount of VAT payable to HMRC, businesses must apportion their overall margin between UK and non-UK supplies.
- In-House Supplies: These are supplies made from your own resources, or from purchases that you have materially altered or processed. The treatment of in-house supplies for the calculation of VAT depends on how they are sold:
- Supplied on their own: Taxed under normal VAT rules.
- Part of a package with margin scheme supplies: The entire package, including the in-house supply, must be accounted for within TOMS. HMRC require businesses to quantify the proportion of ‘in-house supplies’ within the package. This is calculated based on the market value or cost basis of the supplies, depending on the business’s circumstances. Further guidance is detailed in HMRC TOMS Notice 709/5.
- Provisional Payments and Year-End Adjustment: The standard way to operate TOMS is through a year-end adjustment, also referred to as ‘True up’ accounting. The process is as follows:
- Throughout the financial year, you apply a provisional VAT rate to your sales. This rate is based on your previous year’s trading results and estimates what percentage of your margin is subject to UK VAT.
- After the end of your financial year, you perform a detailed calculation to determine the actual margin and the correct VAT due for the entire year.
- You then compare the total VAT you have provisionally paid during the year with the actual VAT liability.
- Any difference is declared on your first VAT return of the new financial year, either as a further payment to HMRC or as a credit.
Conclusion
The Tour Operators Margin Scheme is a compulsory and integral part of VAT compliance for a wide range of businesses in the travel and tourism sector. Its unique focus on taxing profit margins rather than total sales, combined with the inability to recover input VAT on bought-in services, creates a distinct set of accounting responsibilities. From understanding who must register to correctly calculating the margin and handling the year-end adjustment, navigating TOMS requires careful attention.
With the scheme’s scope potentially expanding to include newer business models such as serviced apartments and on-demand transport, and with ongoing reviews of TOMS both in the UK and the EU, staying informed is more important than ever.
If you are uncertain about your VAT obligations under TOMS or need assistance with your VAT returns and calculations, our dedicated team of tax experts can help. We provide clarity and compliance support, ensuring you can focus on growing your business with peace of mind. Contact us today to find out more.