Navigating VAT with the Tour Operators' Margin Scheme (TOMS)

For businesses involved in the intricate world of travel and tourism, understanding the nuances of Value Added Tax (VAT) is paramount. A significant aspect of this is the Tour Operators' Margin Scheme (TOMS). This scheme, designed to simplify VAT accounting for businesses that buy in and resell travel, accommodation, and related services, has specific rules that can be complex to navigate. This article aims to provide a comprehensive overview of TOMS, addressing common questions and providing clarity on how to correctly account for VAT, particularly for businesses operating within the UK.

What is the Tour Operators' Margin Scheme (TOMS)?

At its core, TOMS is a special VAT scheme for businesses acting as principals or undisclosed agents. These businesses purchase travel services and goods and then resell them to customers, often as part of a package. Instead of accounting for VAT on the full selling price of each component, TOMS allows businesses to account for VAT only on the profit margin – the difference between the total amount paid by the customer and the total amount paid to the suppliers. This is a simplification measure, designed to align with EU TOMS principles, treating a bundle of supplies made to the same person as a single supply made in the UK.

Who Does TOMS Apply To?

TOMS is not just for traditional tour operators. It applies to anyone making the specified supplies, even if it's not their primary business activity. This could include:

• Hoteliers: Who arrange coach transport for guests.
• Coach Operators: Who book hotel accommodation for package tours.
• Event Organisers: Who arrange conferences and include accommodation for delegates.

Essentially, if you buy travel facilities and resell them in your own name (as a principal or undisclosed agent), TOMS likely applies. You are acting as a tour operator if you are an undisclosed agent or a principal making 'Margin Scheme supplies' or other types of supplies packaged with them.

What Supplies Does TOMS Cover?

TOMS covers 'designated travel services'. These are typically:

• Accommodation: Hotels, guesthouses, etc.
• Passenger Transport: Flights, coach journeys, ferry crossings, etc.
• Hire of a Means of Transport: Car hire, etc.
• Trips or Excursions: Sightseeing tours, day trips.
• Services of Tour Guides: Local guides accompanying tours.
• Use of Special Lounges: Airport lounges.

Other supplies, such as catering, admission tickets, and sports facilities, can also fall under TOMS if they are bought in and resold without material alteration for the direct benefit of a traveller, and are provided as part of a package with one of the core Margin Scheme supplies.

When Does TOMS NOT Apply?

There are specific circumstances where TOMS does not apply:

• Disclosed Agents: If you act as a disclosed agent, clearly naming the supplier, and your commission is readily identifiable. In this case, VAT on your commission is accounted for under normal VAT rules.
• In-house Supplies: Supplies made from your own resources or those materially altered from what was purchased, provided they are not packaged with Margin Scheme supplies.
• Incidental Supplies: If you buy in some other Margin Scheme supplies but don't buy in accommodation or passenger transport, and the turnover from these incidental supplies is no more than 1% of your total gross turnover.

How Does TOMS Work in Practice?

Under TOMS, you cannot reclaim the VAT charged on the travel services and goods you buy in for resale. Instead, you account for VAT on your margin. This means your output tax is calculated on the difference between what your customer pays you and what you pay your suppliers. Any 'in-house' supplies made as part of a package are also brought into account. You can still reclaim VAT on overheads and costs not directly related to the Margin Scheme supplies.

In-house Supplies and TOMS

In-house supplies are those made from your own resources or where purchased items are materially altered. If these are supplied on their own, they are taxed under normal VAT rules. However, if they are part of a package that also includes Margin Scheme supplies, they must be accounted for using TOMS. This requires a calculation to determine their value within the TOMS framework, either using the market value method or the cost-based method.

Market Value Method vs. Cost-Based Method

The choice between these methods often depends on whether you can reliably determine the market value of your in-house supplies. The market value method involves deducting the market value of in-house supplies from the total package price to arrive at the value of Margin Scheme supplies. The cost-based method, on the other hand, apportions the total margin based on the direct costs of your supplies, assuming a similar profit margin across all components.

A simplified calculation is available if all your in-house and Margin Scheme supplies are standard-rated. This avoids the need to calculate market values but cannot be used for zero-rated or reduced-rated supplies.

Temporary Reduced Rate and TOMS

A temporary reduced rate of VAT (5%) applied to certain supplies, including catering, holiday accommodation, shows, and attractions, between 15 July 2020 and 31 March 2021. While this reduced rate affected the VAT treatment of in-house supplies, the margin on Margin Scheme supplies remained taxable at the standard or zero rate. Relevant bought-in supplies were subject to the reduced rate, which could lower the cost applied to the margin. Adjustments were needed for TOMS calculations to account for this temporary change.

Record Keeping and Calculations

Accurate record-keeping is crucial for TOMS. You need to maintain detailed records of:

• Selling prices of all Margin Scheme packages.
• Direct costs of Margin Scheme supplies and in-house supplies (broken down by VAT liability).
• Market values of in-house supplies (if using the market value method).

The year-end calculation is essential for determining the final VAT liability. This calculation involves:

• Working out the total margin.
• Apportioning the margin across different types of supplies and VAT liabilities.
• Calculating the output tax due.

During the year, you account for VAT on a provisional basis using percentages derived from your previous year's calculation. An annual adjustment is then made via your VAT return to correct any under or overpayment.

Invoicing Requirements

Crucially, you cannot issue VAT invoices for supplies accounted for under TOMS. This is because the exact output tax is not known until the year-end calculation is complete. For business-to-business sales under TOMS, invoices must include a statement indicating that the scheme has been applied, such as 'this is a Tour Operators’ Margin Scheme supply'.

Key Takeaways

Navigating TOMS requires careful attention to detail. Key considerations include:

• Identify applicable supplies: Determine if your business activities fall under TOMS.
• Understand Margin Scheme vs. In-house: Differentiate between bought-in supplies and those made from your own resources.
• Choose the right calculation method: Market value or cost-based, depending on your circumstances.
• Maintain meticulous records: Essential for accurate year-end calculations.
• Adhere to invoicing rules: No standard VAT invoices for TOMS supplies.

If you are unsure about your obligations or how to apply TOMS to your specific business, it is always advisable to seek professional advice or contact HM Revenue and Customs (HMRC) for clarification.

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