23rd January 2024
The Tour Operators Margin Scheme (TOMS) is a special scheme for businesses that buy in and resell travel, accommodation and certain other services. TOMS is an area of VAT which often rings alarm bells for businesses and can be quite daunting, but is it as complicated as many believe?
What is TOMS?
TOMS is essentially a simplification measure that allows a package of services to be provided as a single supply. Under the scheme:
- VAT cannot be reclaimed on margin scheme supplies bought in for resale.
- VAT does not have to be accounted for on the full selling price of the margin scheme supply, only on the difference between the VAT inclusive purchase price and the selling price.
- There are special rules for determining the place, liability and time of such supplies.
- VAT invoices cannot be issued for such supplies.
- The value of the supply is the margin.
Who must use TOMS?
In principle, it applies to anyone who buys in and resells travel facilities for the direct benefit of a traveller, irrespective of whether the supplies are used for business or private purposes. So, TOMS will apply to businesses that consider themselves tour operators, but crucially, any other businesses who engage in buying and supplying travel facilities may also be affected. They simply must only be buying in and reselling travel, accommodation and other services for TOMS to apply.
TOMS is therefore not only relevant to standard travel agents, for example, but also businesses that arrange conferences which include hotel accommodation for delegates, or charities organising overseas treks, to name just a couple of common examples.
Supplies covered by TOMS
A margin scheme supply is seen as a supply that is bought in by a business, and supplied without material alteration or further processing for the benefit of a traveller, by a tour operator from an establishment in the UK.
A ‘traveller’ is a person, including a business or local authority, who receives supplies of transport and/or accommodation, other than for the purposes of re-supply. In other words, TOMS will not apply if the services are being sold to a business for subsequent resale.
Subject to meeting these conditions, margin scheme supplies would include:
- Passenger transport
- Transport hire
- Use of special lounges at airports
- Trips or excursions
- Services of tour guides
Services which may be treated as margin scheme supplies, if supplied with one of the above, and which also meet the above conditions, will include:
- Theatre tickets
- Sports facilities
In some instances, the above bought in services will be supplied with services that are not bought in (in house supplies). These are essentially supplies from an entity’s own resources or supplies from purchases that have been bought in but materially altered or processed. For example, this could include coach transport where an operator owns or hires a coach and supplies a driver, fuel, etc.
If these in house supplies are supplied on their own, then they do not fall within TOMS. However, if they are supplied with the margin scheme supplies detailed above, then they would fall within the scheme.
VAT liability of TOMS supplies
As noted above, VAT is only chargeable on the margin generated from the package of TOMS supplies but are subject to the place of supply rules.
Following Brexit, it is now relatively straight forward to identify when VAT should or should not be charged on the margin. If the tour is taking place in the UK, then UK VAT should be charged on the margin. However, if the tour is taking place outside of the UK, the place of supply is outside of the UK and the margin is zero rated for VAT purposes.
The main complexity regarding the place of supply of TOMS supplies is when this includes transport which is provided partly inside the UK and partly not. So, using the example of the coach transport mentioned above, if this was provided in the UK but the rest of the package was in relation to a trip in the EU, then there would be a requirement to apportion the margin and account for VAT on the element that relates to the UK part of the package, with the remainder being outside of the UK.
It should also be noted that where in house supplies are provided, the place of supply of these follows the general place of supply rules, even if they are provided as part of a package with margin scheme supplies.
What should businesses take into consideration?
There are clearly a number of complexities when it comes to TOMS. This includes the question of the place of supply, and the question of in house supplies being provided as part of a package of services, both of which are detailed above. However, in addition, other pitfalls include the recovery of VAT on associated costs and the question of whether the costs are direct costs to be included in the margin scheme calculations, or whether they are indirect costs outside of the margin scheme and on which VAT can be recovered.
Further complexities include the issues around the calculation of the margin itself, especially if there are discounts included and in house supplies as well, plus the time of the supply questions.
That said, even though there are complexities around TOMS, it is not as daunting as it looks and once it has been determined that the provided supplies fall within TOMS and a process has been established regarding the margin scheme calculations, then TOMS can become relatively straightforward.
If you do have any supplies which you do feel could fall within TOMS, please get in touch with Stephen Patey, VAT Senior Manager, or a member of our VAT team for further assistance.