The Tour Operators' Margin Scheme

TOMS is a special EU VAT scheme. Its purpose is simplification but it suffers from a reputation for complexity.

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The scheme's name is misleading: it is not just for "tour operators" but, rather, must be used by any business supplying travel in the specified circumstances. TOMS often applies to travel agents, those selling "dynamic packages" and events agencies as well as tour operators. Equally, TOMS is not just payable on holidays and other forms of leisure travel; it often also applies to business travel. For the purposes of this guidance, the term "tour operator" should, therefore, be taken to mean any business selling travel services in the circumstances specified for the operation of TOMS.

The future of TOMS is very uncertain. We need to consider the effects of Brexit, of the European Commission's plans to overhaul the scheme and a European judgement which questions a number of current practices adopted in the UK (and elsewhere). These points are considered below.

TOMS VAT is a charge on the gross margin made by a tour operator payable in the Member State in which it conducts its business. No recovery of VAT on the costs of the travel supplied to the tour operator is possible.

When does TOMS apply?

TOMS must be used when the following five conditions are all satisfied:

1. There is a supply of travel services

The term "travel services" is not defined by law. In the view of HMRC, the supply of certain items, "primary travel services", is always within TOMS if the other conditions listed below are satisfied. These primary services are:

  • Accommodation
  • Passenger transport
  • The hire of a means of transport
  • The use of an airport lounge
  • Tour guides
  • Trips and excursions

Please note that there is no need to have a package for TOMS to apply; the supply of any of the above on its own can be in TOMS.

In addition, "secondary travel services" fall within TOMS if supplied as part of a package with primary travel services and these include sports tickets and facilities, theatre tickets and catering. For example, a theatre ticket sold on its own does not fall within TOMS. However, the sale of such a ticket together with, say, a hotel room will be within TOMS if the other conditions listed here are satisfied.

2. The supplier is acting in its own name.

A supplier must act as a principal or as an undisclosed agent to fall within TOMS. A supply made on a disclosed agency basis cannot be within the scheme. The distinction between these terms can be very difficult and many travel businesses display certain characteristics of an undisclosed agent and/or principal but, at the same time, resemble a disclosed agent in other respects. There is often great uncertainty and considerable scope exists for disputes with HMRC, as demonstrated by the Secret Hotels 2 (formerly Med Hotels) case which considered the meaning of agent in a travel context. This was decided in favour of Med by the Supreme Court in 2014 and, since then, similar decisions have been given in the Hotels4U, Opodo, Hotelconnect, Alpha Rooms and Lowcost cases.

3. The travel services are acquired from a third party.

TOMS does not apply to services provided from own resources. For example, transport on a coach owned by the tour operator cannot be a TOMS supply. Such supplies are normally called "in-house" supplies and are subject to the "normal" VAT accounting regime.

4. The services are supplied without "material alteration" or "further processing".

The services must be supplied in the same form as when supplied to the tour operator, i.e. there must be no material alteration or processing applied by the tour operator. Where there is material alteration or processing, TOMS is inapplicable. Again, such supplies are referred to as "in-house supplies".

5. The services are supplied for the benefit of a traveller.

The final condition limits TOMS to supplies made "for the benefit of a traveller". The meaning of this condition has been the subject of much litigation, most notably in the form of a 2013 decision of the Court of Justice of the European Union ("CJEU") - see below.

Supplies can be seen to fall into one of the following three categories:

  • Supplies to private individuals for their use. TOMS can apply in this situation, i.e. the private person is a "traveller";
  • Supplies to a business customer for the use of that customer, for example by an employee. These also satisfy the test and TOMS can apply. Examples include incentive travel, conferences, meetings etc.
  • Supplies to a business customer for onward supply by that business i.e. wholesale supplies. These do not fall within TOMS. However, see "The future of TOMS" below for the CJEU's view on this.

Calculation of VAT due

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Where TOMS does apply, VAT is paid on the gross margin in the Member State in which the tour operator is located.

The margin on services enjoyed in the EU is standard rated whilst that made on non-EU services is zero rated. No regard is taken of the nature of the service supplied by the tour operator: for example, no zero rating is possible on the supply of passenger transport (which is normally zero rated when supplied by airlines, rail companies, coach operators etc). However, ABTA and HMRC agreed a number of schemes which allow a tour operator to avoid paying VAT on passenger transport. The remaining two schemes are the transport company scheme and the agency scheme. Most UK tour operators have adopted one of these.

The tour operator does just one TOMS calculation each year at its financial year end, based on the figures for the year. VAT is paid provisionally on an estimated basis during each financial year based on the results of the preceding year's calculation.

However, the CJEU also considered the way in which TOMS VAT should be calculated and held that such an aggregated approach is not permissible - see below.

The future of TOMS

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There are numerous differences in the application of TOMS between Member States. The European Commission took legal actions at the CJEU in 2013 to try to establish some consistency. First, the Court decided that wholesale supplies should be in TOMS. As above, the UK position is that wholesale supplies are not in TOMS. The CJEU thought that this is wrong. Adoption of this decision would have far reaching implications for wholesale suppliers and would also require the withdrawal of the transport company mitigation scheme referred to above. Second, the Court decided that there is no basis for an aggregated, annual basis of the calculation such as that used in the UK. Instead, a tour operator should calculate TOMS VAT separately for each sale.

However, in January 2014, HMRC announced that no changes would be made for the time being but taxpayers could apply the CJEU position if they found it beneficial to do so. This remains the position (despite the Court confirming its position in February 2018 in a similar case taken by the Commission against Germany) so a tour operator continues to have a choice whether to adopt TOMS for wholesale business and whether to carry out an annual calculation or a separate calculation for each relevant supply.

The position going forward is obscured, however, by Brexit and the Commission's plans to reform the VAT treatment of travel. TOMS is an EU scheme and hence, post Brexit, may not exist in the UK. That said, recent draft legislation suggests that TOMS will continue, albeit perhaps not in its current form. The future of TOMS should become clearer during 2018.

Despite Brexit, the EU VAT system is expected to remain influential in determining the future UK position. The EU rules are under review at the moment and a detailed study of the current rules and of possible reform options was published in December 2017.