The UK’s Tour Operator Margin Scheme – TOMS

Let’s talk about the TOMS system in the UK. It’s a specialized and often complex VAT accounting scheme that is crucial for businesses in the travel and services sector.

Executive Summary

The Tour Operators’ Margin Scheme (TOMS) is a mandatory VAT scheme for businesses that buy and sell “designated travel services” (like accommodation, passenger transport, and hire of means of transport) and act as a principal or “undisclosed agent” in the UK.

Instead of paying VAT on the full selling price to the customer, the business only pays VAT on the profit margin it makes on the supply.

1.What is TOMS and Why Does It Exist?

The TOMS was created to solve a significant practical problem for travel operators operating across international borders.

• The Problem (Pre-TOMS): A UK-based tour operator selling a package holiday to Spain would have to:
  1. Charge UK VAT on the entire selling price to the customer.
  2. Try to reclaim Spanish VAT incurred on the hotel stay. This was often impossible or administratively nightmarish, as they were not established in Spain.
     This led to “double VAT” or a heavy administrative burden, stifling the industry.
• The TOMS Solution: TOMS simplifies this by:

• 1. Treating all supplies as made in the country where the business is established (e.g., the UK tour operator treats everything as a UK supply).
  2. Only taxing the profit margin. The VAT is calculated on the difference between what the customer paid and the cost of the bought-in services.
  3. No VAT recovery on bought-in services. Since you don’t charge VAT on the full price, you cannot reclaim the VAT on the costs of the travel services you purchase. This is the fundamental trade-off of the scheme.

2. Who Does TOMS Apply To?

TOMS is mandatory for a business that meets all of the following conditions:

1. Supplies “Designated Travel Services”: This includes:
   • Accommodation (hotels, etc.)
   • Passenger Transport (flights, trains, coaches, ferries, etc.)
   • Hire of Means of Transport (car hire, etc.)
   • Use of Special Luggage Facilities (e.g., left luggage)
   • Trips or Tours (guided tours, excursions)
2. Acts as a Principal: This is the key test. You are acting as a principal if you:
   • Take on the contractual risk (you are the one the customer sues if the hotel or flight is cancelled).
   • Your name appears on the customer’s ticket or voucher.
   • You are the one who pays the supplier, not the customer directly.
   • Crucially, if you act as an “agent” publicly disclosing your principal’s name, you are likely outside of TOMS. If you are an “undisclosed agent,” you are inside TOMS.
3. The Bought-in Services are Supplied Outside the UK: If you buy a hotel in London and sell it as part of a package, this is a domestic supply and normal VAT rules apply. TOMS primarily applies when you are buying services from suppliers located in other countries.

3. Typical Businesses in TOMS:

• Traditional Tour Operators
• Many Online Travel Agencies (OTAs) like Expedia, Booking.com (when acting as principal)
• Businesses that buy in flights and hotels to create bespoke corporate travel packages
• Some companies arranging pilgrimages (as established in a notable case)

4. How Does TOMS Work? The Mechanics

The calculation can be done at the end of the financial year using a “Simplified Method” or a “Specified Method.” The simplified method is most common for smaller operators.

The Simplified Method – Annual Calculation:

Step 1: Calculate Your Total Margin

• • Total Sales (the full amount all customers paid you for TOMS supplies)
  • Minus Total Cost of Bought-in Travel Services (the amount you paid to hotels, airlines, etc.)
  • = Total Margin

Step 2: Determine the VAT Rate & Allocation

• • You must split your margin based on the place of supply of the services you sold.
  • For example, what proportion of your margin relates to hotel stays in the EU vs. the UK? This requires detailed record-keeping.
  • The standard practice is to use the EU VAT MOSS (Mini One Stop Shop) return to declare and pay VAT on margins related to EU supplies.

Step 3: Calculate the VAT Due

• • You apply the relevant UK VAT rate (currently 20% for standard-rated supplies) to the portion of the margin relating to UK supplies.
  • You apply the relevant EU member state’s VAT rate to the portion of the margin relating to supplies in that specific country (via VAT MOSS).
  • VAT Due = (UK Margin × 20%) + (France Margin × French VAT Rate) + (Spain Margin × Spanish VAT Rate)…

Key Point: You do not charge VAT to the customer on their invoice. The margin scheme calculation is an internal VAT accounting process. Your customer invoices will not show VAT as a separate line item.

5. Key Consequences and Challenges

• No Input VAT Recovery: The biggest impact. You cannot reclaim the VAT on the travel services you purchase (e.g., the VAT on a hotel bill from France). This becomes a direct business cost.
• Complexity: Determining the place of supply and apportioning the margin correctly is highly complex, especially for multi-destination trips.
• VAT MOSS Obligations: For margins on EU supplies, you must register for and file quarterly VAT MOSS returns.
• Profitability Sensitivity: Since VAT is charged on the margin, if your margin is very low, your VAT bill is low. However, if your costs decrease (e.g., you get a better deal from a supplier) but your selling price stays the same, your margin and thus your VAT bill increase.

6. The Impact of Brexit

Brexit did not abolish TOMS in the UK. The UK simply created its own version of the scheme.

• The rules and principles remain largely the same.
• The main change is in the administration of VAT on EU supplies. UK businesses now use the UK VAT MOSS portal to report and pay VAT on the margin related to EU supplies, just as they would for any other EU country.

Conclusion

The TOMS is a specialist VAT regime that provides a practical solution for cross-border travel businesses but at the cost of significant complexity.

• For a business in scope, it simplifies the nightmare of registering for VAT in multiple countries.
• The trade-off is the loss of input VAT recovery and the administrative burden of the annual margin calculation and place-of-supply analysis.

Any business buying and reselling travel services across borders should seek expert VAT advice immediately to determine if TOMS applies to them and to ensure they are calculating and reporting their VAT correctly. Getting it wrong can lead to significant liabilities with HMRC.