T
: 01603 662277 | F : 01603 618051 | E : martin@pooley.co.uk |
| MARTIN POOLEY |
Tour Operators' Margin Scheme Consultant (TOMS VAT) |
Printer Friendly (MS Word Document) Tour Operators' Margin Scheme (TOMS) A GUIDE TO THE Tour Operators' Margin Scheme FOR VAT In 1992 I set up as an independent accountant and in 1993 I started to specialise in the Tour Operators’ Margin Scheme. Now I am well known in the travel trade and Customs. Previously I was a tax partner in KPMG. I have often been asked by clients for some notes on TOMS so I have written this guide. It should be read in conjunction with Customs’ Notice 709/5 What is TOMS? Suppose you pay a hotel in Paris £100 for accommodation and sell it to a customer for £120. You cannot reclaim the input tax in the £100 without registering in France. You do not want to pay output tax on £120 or your margin will disappear. The solution is to do nothing in France and pay output tax on £20 in the UK. Unfortunately TOMS has been made unnecessarily complicated so it is misunderstood and disliked. One result is that it is easy to pay too much TOMS. Any system of taxation will result in some taxpayers paying too much and others paying too little. In TOMS the result is unbalanced. In my experience, many operators overpay TOMS and the scope for repayment claims should not be underestimated. Copyright Martin Pooley 2005
- Tour Operators' Margin Scheme (TOMS VAT) brief
outline Caveat 1 You should use TOMS if you buy and resell accommodation etc or transport as principal. Accommodation etc includes excursions, taxis, car hire and guides. TOMS is better than the alternative, ie registering for VAT in every country in which you operate. 2 TOMS is a year end tax calculation. Think of it like a corporation tax computation. It makes you pay UK VAT on the margin on EU accommodation etc. You cannot reclaim UK or foreign input VAT on the corresponding costs of sale so the overall effect is that you pay VAT on the selling price of EU accommodation etc. 3
The margin apportioned to non EU destinations is not liable to tax.
Example: 4
Compare with payments on account and adjust in the first return
in the next year: 5
The annual calculation works out the standard-rated margin as a
percentage of sales. You apply this percentage to departures to
estimate your liability in the next year:
Sales in 2005 above 1,500,000 6 The margin apportioned to EU transport became taxable after 1995. The typical increase in the TOMS liability was about 50%. You can avoid this increase by using a transport company with its own VAT number, ATOL etc. It buys the transport and sells it to the tour operator at the price that reduces the TOMS liability to what it would have been under the old rules. See para 39 below for how this works. 7 The margin on insurance is exempt. Cancellation income is not liable. 8 There are many special situations eg if you sell to another business, if you make inhouse supplies and if you supply a mixture of EU and non EU holidays. 9 Check that the margin in your calculation reconciles to the profit in the accounts. 10
TOMS in two words: ask me. 1 The Tour Operators’ Margin Scheme for VAT (TOMS) is not that bad. You have to do a complicated calculation at the year end but it is no worse than a corporation tax computation. TOMS is just more specialised and therefore poorly understood. 2 Why do we need TOMS? Suppose a UK tour operator buys accommodation in France from a hotel and flights from an airline and sells a package holiday. The operator is selling accommodation in France and under general principles of VAT should register in France, pay output TVA on the selling price of the accommodation and deduct the input TVA paid to the hotel. But what is the selling price of the accommodation? How much UK VAT should the operator pay? And what about the flights? 3 TOMS is an EU wide simplification measure to avoid these problems and protect tour operators from having to register in other member states of the EU. The rationale is clear for cross border holidays but TOMS is mandatory even if the holiday is UK only. 4 Under TOMS, tour operators pay output VAT on their margin not on their selling price and they pay it in the country in which they are established. They do not register for VAT in other member states and cannot deduct input VAT on the corresponding costs of sale, whether these are in the UK or in other member states. In effect they are paying VAT on the selling price and VAT has achieved its objective of taxing consumption. 5 The UK uses a cost based apportionment system relying on the annual accounts. The margin apportioned to EU accommodation is standard-rated. Example: 6 Note that the sales and cost of sales are both VAT inclusive so the rate of VAT is not 17.5% but 7/47 ie 17.5%/117.5% (the jumbo VAT fraction: think Boeing 747). 7 When does TOMS apply? TOMS applies when a person buys and resells certain services, eg accommodation and transport. TOMS applies even if the bought in service is sold on singly, not in a package. It does not apply to agency transactions eg travel agents. 8 Margin scheme supplies are goods or services of any kind commonly provided by tour operators or travel agents. Customs say that accommodation, passenger transport, hire of a means of transport, use of special lounges at airports, trips or excursions and services of tour guides always fall within this category. Other supplies, such as catering, theatre tickets and sports facilities, may also fall in TOMS if they are bought in and sold on as part of a package with one or more of the supplies listed above. 9 TOMS is designed for tour operators providing holidays but many other businesses are also caught by TOMS eg travel agents acting as principals, seat only operators, organisers of sporting events, training courses, incentive travel, or conferences and hotels supplying additional services such as car hire, transport or excursions. 11 For a fuller understanding of TOMS you should read Article 26 of the Sixth VAT Directive (reproduced at para 101 below). As usual, EU legislation is clearer than UK legislation. You could then read The VAT (Tour Operators) Order 1987 (SI 1987/1806) but for most the starting point will be Customs’ Notice 709/5. TOMS is essentially as it was when it was first introduced in 1988 but there were changes in 1996 (the extension of TOMS to the margin on EU transport – see para 34) and the treatment of supplies to other businesses changed in 1996 and 1998 (see para 68 et seq). More recently, there has been a lot of discussion on possible “harmonisation” of TOMS across the EU. If this happens, the most important change is likely to be that wholesalers would become liable to TOMS and the transport company scheme would cease to work. This would hurt small operators. Meanwhile the business world has changed and TOMS is struggling to cope with dot.com operators and the market changes flowing from low cost carriers. 12 How does TOMS differ from normal VAT rules? Under normal VAT rules, the value of a supply is the amount the customer pays but under TOMS it is the margin. So a normal taxpayer charges customers VAT on sales (output tax) and pays suppliers VAT on purchases (input tax). Under TOMS, the taxpayer accounts to Customs for output tax on the margin. The input tax on cost of sales is not deductible (input tax on overheads is, as is input tax on inhouse costs). The margin is estimated monthly or quarterly and calculated precisely once a year. When considering when to register, a tour operator should look at the margin not at the gross sales (para 4.1 of 709/5/04). 13 Under normal VAT rules, the time of supply (which determines when the output tax is payable) is usually when an invoice is issued or payment received. Under TOMS, the normal time of supply (tax point) is the departure date of the holiday. 14 Under normal VAT rules, the place of supply (which determines which government is entitled to collect the output tax) for accommodation is where the accommodation is situated and for most other travel related supplies where the supply is enjoyed. Under TOMS, the place of supply is where the operator is established. 15 Under normal VAT rules, the liability of the supply (rate of output tax applicable) depends on the nature of the supply. Under TOMS, the liability depends on the destination. Non EU holidays are zero-rated. In addition, under the transport company scheme the liability depends on the nature of the underlying cost (see para 39 below). 16 The UK has implemented TOMS as an annual cost based apportionment calculation. It takes the gross profit in the annual accounts and apportions it pro rata to the costs of sale. Depending on the nature of the cost of sale, the margin apportioned to it is either standard-rated or zero-rated. 17 The margin apportioned to non EU holidays is zero-rated. This gives non EU destinations a price advantage over EU destinations and is a fundamental flaw: an EU designed tax should not disadvantage EU destinations against the rest of the world. 18 The margin apportioned to EU accommodation is standard-rated. Similarly for EU meals, car hire, excursions etc. 19 The margin on transport to EU destinations is standard-rated but was zero-rated until 1996. The change was forced on the UK to bring the UK into line with EU law. Customs have approved methods to mitigate this increase and most tour operators with EU programmes have set up transport companies to do so. See para 34 below. 20 Costs are described as zero-rated when the margin apportioned to those costs is zero-rated and as standard-rated when the margin apportioned to them is standard-rated. 21 The annual calculation follows a standard formula. Customs’ Leaflet 709/5/88 used algebra (A, B, C etc). Subsequent Notices 709/5 use numbered steps instead though the logic is the same. Algebra is easier to use and persists in Customs’ Information Sheets so a hybrid is used in this note: A(1) means A in 1988 algebra and step 1. 22 A(1) = sales, before deducting agents’ commissions or TOMS VAT. TOMS VAT is normally deducted from turnover in the accounts and agents’ commissions are sometimes also deducted from turnover. The income for TOMS is the gross amount paid by travellers. The income should be reduced by deducting insurance at selling price, any retained deposits or cancellation income and compensation payments. 23
The other letters are used as follows: 24
Example: a typical annual calculation without inhouse supplies 25 See the Appendix to these notes for an Excel spreadsheet showing how the annual calculation relates to the accounts and including inhouse supplies. 26 It is important to check the annual calculation by reconciling the TOMS margin with the gross profit in the accounts. The major differences are usually travel agents` commission if deducted in arriving at gross profit in the accounts (agents’ commission is not deductible in TOMS: instead operators can reclaim the input VAT on the commission, which is better), the insurance commission (it is exempt so insurance is excluded from income and costs in TOMS), cancellation income and the TOMS VAT which is normally deducted from turnover in the accounts. See example in the spreadsheet Appendix to these notes. 27 The rest of the alphabet is used to calculate sales values etc and to show intervening stages, but is not needed to work out the annual liability. For readers who like algebra, the annual liability is K(20) = (7/47) x B(2) x (A(1)/G(10)-1), assuming there are no standard-rated UK inhouse supplies ie assuming D(4) = 0. If there are, such as a hotel owned in the UK, the additional liability is P(21) = (7/47) x D(4) x A(1)/G(10). The provisional percentage and annual adjustment 28 The annual calculation is carried out at the end of the year but operators have to pay VAT in the intervening returns. This is done by estimation. When they complete the annual calculation they work out a provisional percentage. During the following year they apply the provisional percentage to the sales value of departures in each quarter or month so the VAT liability is the same proportion of sales as the previous year. 29 When the operator does the next annual calculation and compares the liability with the provisional payments they will have underpaid or overpaid and must adjust the difference. This annual adjustment is to be made in the return following the year end. In most cases this gives 4 months to do the calculations. For example if an operator prepares accounts to 31 December and makes quarterly VAT returns to the same date, the annual adjustment based on the 2005 accounts should be made in the return for March 2006 which is due by 30 April 2006. 30 Alternatively, if the operator makes monthly returns, the 2005 adjustment belongs in the January 2006 return. This gives 2 months to complete the calculation which may not be long enough in which case the operator should make an adjustment in the January return based on the latest information, eg draft accounts, and make any further adjustment when the accounts are finalised. The adjustment belongs in the January 2006 return so if any later adjustment is more than £2,000 it should be disclosed separately to Customs. Late adjustments are to be avoided if at all possible. If you have underpaid, Customs will charge interest and possibly penalties. If you have overpaid, you may have trouble persuading Customs to process the adjustment and meanwhile you are out of pocket. 31 If the operator makes quarterly returns but they do not coincide with the year end, the period available will be 2 or 3 months eg if the year end is 31 December 2005 and a return ends on 31 February 2006, the 2005 adjustment should go in that return. If the VAT returns do not coincide with the year end, write to Customs and ask them to bring them into line. This makes the calculations easier and gives you longer to do them. 32 The annual adjustment for the previous year should be excluded from the payments for the current year when they are compared with the final liability. 33
Going through the usual boxes on the tour operator’s VAT return: The 1996 increase, VAT on EU transport 34 The treatment of EU transport changed in January 1996. Until December 1995, the margin apportioned to EU transport was zero-rated (the old rules). From January 1996, the margin apportioned to EU transport is standard-rated (the new rules). 35
Example: the 1996 increase TOMS
Old rules New rules 36 The effect of standard-rating the margin on EU transport depends on the programme. An operator supplying no EU transport was not affected eg an accommodation only operator. For a typical EU programme of transport and accommodation it increased the liability by about 50%. 37
Customs have agreed three ways of reducing the impact of the 1996
change. Most operators should find it possible to use one of these
to eliminate the additional VAT. The three options for mitigating
the 1996 increase are as follows: 38 The first has been adopted by the majority of tour operators selling programmes including EU flights. The second is particularly suitable to an operator who sells packages including cross channel ferries but not much in the way of flights. The third is rarely applicable. The first two are dealt with below. Using a transport company to mitigate the 1996 increase 39 The idea is to set up a new company ("Newco") to buy the transport from the coach company, airline or other supplier, sell it to the tour operator (“Oldco”) at a profit and so reduce Oldco’s TOMS liability. Customs accept Newco is wholesaling zero-rated transport and has no TOMS liability. See Customs’ Information Sheet 1/97. However, as set out at para 68 below, this may change so the transport company may not last. 40 The more profit earned in Newco the less TOMS is payable in Oldco. Customs say that they will not attack the Newco mark up provided it does not reduce the TOMS liability below the level that would have applied under the old rules. It is therefore necessary to do the calculation two ways each year, under the old rules and the new rules, and to keep a record of the costs before any Newco mark up. 41 The mark up can be found by trial and error or formula. Use my spreadsheet (see Appendix) or my algebra published as the more complicated formula in Information Sheet 1/97. Using the simpler formula in Information Sheets 1/97 and 2/96 will give the wrong answer in certain cases ie if D(4) is not zero. Check you get the same liability under the old rules with no Newco mark up and under the new rules with a mark up. 42 Newco will earn a profit on the transport and can be charged a management charge for services from Oldco but the profit shown by Newco may exceed the total profit in which case Oldco, the operator, will make a loss. There may be corporation tax implications if there are losses brought forward and the Revenue may challenge the level of management charges. More probably there may be a restriction of small companies’ relief for corporation tax. There may also be bonding and licensing implications and effects on any PRP schemes. However, these and other wider tax and commercial implications of using Newco are beyond the scope of these notes. 43
Example: the transport company * = A 56% mark up on transport in Newco ensures the liability under the new rules equals what it would have been under old rules. The mark up varies with the results. See the example in the spreadsheet at the back of these notes. 44
The main points on the transport company are as follows: 45 The annual adjustment may or may not be material to the accounts but you should not finalise the accounts until you know the mark up in Newco and you cannot work out the mark up without the annual calculation. Therefore optimising the Newco saving depends on doing the annual calculation before you finalise the accounts. Agency, another solution to the 1996 increase 46
Customs say that agency supplies are outside TOMS provided: 47 Customs will accept operators act as agent for the transport provider if they satisfy the conditions above. The commission earned is then taxed under general principles, not TOMS, but if it is for arranging transport the commission is usually zero-rated. 48 However, most airlines will not accept that tour operators are acting as their agent when packaging a net fare in a holiday, for bonding reasons. So the agency route to mitigating the 1996 increase is not open to most tour operators selling flights. The agency route is generally used by tour operators selling ferry packages. 49 Where the agency commission is readily identifiable the cost and selling price of the transaction can be deducted from the accounts totals before the annual calculation is carried out. In practice however, if an operator charges an inclusive price for a mixture of eg ferry transport sold as agent and accommodation sold as principal, it is not clear how much of the selling price is for the ferry so this adjustment cannot be made. If the ferry agency commission is not readily identifiable, the cost should be included in zero-rated costs in the annual calculation after 1996 as in 1995 and earlier years. See Information Sheet 4/96 and Notice 709/5 para 6.6. The cost of agency supplies for which the commission is not readily identifiable is included at step 8 (B) if the commission is standard-rated or at step 9 (C) if the commission is not liable to UK VAT. 50 Adopting an agency structure will fundamentally change the operator’s contractual relationships with customers and suppliers. Most tour operators selling flights will not be able to use the agency solution as explained at paragraph 48 above. 51 Inhouse supplies arise where the operator is not buying in and reselling the service but is providing it from his own resources eg if you own coaches, have your own airline, run your own catered ski chalets or own hotels. In addition, Customs say that if the operator buys in services but packages them together so that what he sells is different from what he buys an inhouse supply is being made but see para 54.2 below. General principles of VAT apply to inhouse supplies and take precedence over TOMS rules. In particular, normal place of supply rules apply so that there is, for example, no UK liability on the selling price apportioned to non UK inhouse accommodation. Where inhouse supplies are made but there are no bought in supplies, TOMS does not apply. General principles of VAT apply though an apportionment may be necessary. Inhouse supplies fall into four categories dealt with in turn below (steps 4, 5, 6 and 7 in the calculation). See para 55.2 below about the valuation of inhouse supplies but it is a contentious area and changes are expected after the ECJ decision in MyTravel. 52 D(4) If the operator owns and runs a hotel in the UK and includes it in a holiday in TOMS, it is inhouse and the calculation taxes not the margin but the selling price of the hotel. The selling price is assumed to be cost plus margin calculated pro rata. As the full selling price is taxed, input tax attributable to the costs is deductible. The hotel is a standard-rated UK inhouse supply and the costs appear at D(4) in the calculation. Because other figures are VAT inclusive, 17.5% is added to the VAT exclusive costs. 53.1 E(5) If a coach operator provides coaching as part of a holiday in TOMS, it is inhouse and zero-rated. Similarly for airlines and other providers of transport. The operator is seen as acting as a provider of transport rather than buying in and selling on. The selling price is assumed to be cost plus margin calculated pro rata. As the full selling price is taxed, input tax attributable to the costs is deductible. Such transport is a zero-rated UK inhouse supply and the costs appear at E in the calculation. Note that the UK zero-rates coaching supplies but other countries may not. Since the place of supply of transport is where it takes place, coach operators may be required to pay VAT on the distances covered in other countries. This causes coach operators problems. In particular, Germany has recently tightened up and operators must have a certificate of registration for MWS before they send coaches to Germany. River cruises similarly. 53.2 E(6) If an operator runs a school teaching EFL (English as a Foreign Language) it is inhouse and exempt. The selling price is assumed to be cost plus margin calculated pro rata. As the supply is exempt, input tax attributable to the costs may not be deductible. 54.1 F(7) Where an operator owns and runs eg a hotel in another country and includes this in a holiday in TOMS, the hotel is inhouse and outside the scope of VAT. The operator of the hotel may be liable to register in the other country so the income is not taxed in the UK. Once more, the selling price is assumed to be cost plus margin calculated pro rata. The hotel is an inhouse supply that is outside the scope of UK VAT, ie treated as zero-rated, and the costs appear at F(7). Add notional VAT to these costs at the rate applicable locally if registered and required to pay local output VAT on sales. 54.2 Customs say that if the operator buys in services but packages them together so that what he sells is different from what he buys, an inhouse supply is being made. The usual example is a conference organiser. However this category of inhouse supplies is less clear than when the operator owns the resources. In addition, just because a conference is inhouse does not make any associated transport or accommodation inhouse. The transport and accommodation remain in TOMS (709/5/04 para 7.13). 55.1 The valuation of inhouse supplies can make a lot of difference to the TOMS liability. The UK rules for valuing inhouse supplies were challenged in the European Court of Justice in the Howden Court Hotel case (also called Madgett & Baldwin). The ECJ ruled in 1998 that market values should be used rather than cost plus. Customs then consulted briefly on possible changes to UK law but no new legislation has been brought forward. More recently the VAT Tribunal referred another case to the ECJ (MyTravel or Airtours). In May 2005 the Advocate General released his Opinion in MyTravel along similar lines to his Opinion in Howden Court Hotel so it is expected that the ECJ decision in MyTravel will follow Howden Court Hotel and new rules will have to be introduced for inhouse supplies. Meanwhile a lot of tour operators have overpaid, especially coach operators, and should be making repayment claims. In view of the three year time limit on repayment claims, the sooner claims are made the better. To make a claim you need to quantify the amount of tax overpaid by VAT period. It is not sufficient to notify Customs in general terms. 55.2
The valuation of inhouse supplies is a contentious area. There are
many practical problems. Some of the common issues are as follows:
Non EU destinations, worldwide or EU only method 56 After enlargement in 2004, the EU consists of 25 countries: Austria, Belgium, Cyprus, The Czech Republic, Denmark, Estonia, Finland, France (incl Monaco), Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal (incl the Azores and Madeira), Slovakia, Slovenia, Spain (incl the Balearic Islands), Sweden and the UK (incl the Isle of Man). It excludes Norway (voted against joining), the Canaries (though legally part of Spain) and the Channel Isles (though legally part of the UK). Other territories that are excluded but commonly cause confusion include Andorra, Gibraltar, Greenland, Iceland and San Marino. The EU is to be enlarged again in 2007: see para 60. 57 Holidays in non EU destinations are not liable to TOMS. There are two ways to achieve this in the calculation. Under the worldwide method, supplies to non EU destinations are zero-rated ie the margin attributed to non EU costs is zero-rated. The calculation uses worldwide sales and costs of sales and assumes the margin is proportional to the costs ie that the same percentage mark up applies in all destinations. The other way to do the calculation is to use only EU income and costs. Holidays in non EU destinations are ignored. Holidays that are enjoyed partly in the EU and partly outside are included in the calculation and the non EU costs are zero-rated. Paras 5.7 & 5.8 and TL3 of 709/5 refer. Using the EU only method is called streaming. The mark up on non EU destinations is generally lower than on EU destinations so the worldwide method usually produces a lower liability than the EU only method. But this is not always so. For example, margins in Turkey have at times been higher than in Greece. 58
Example: EU only or worldwide So in this example the worldwide calculation gives a lower liability. This is normal. 59 Operators can change from one method to the other if they notify Customs a year in advance. If you change, you need to consider the effect on the provisional percentage. When you stream you get a higher percentage but you apply it to less turnover. When you elect to stream, you will not have an EU only provisional percentage from the previous year unless you do the calculation both ways. You should avoid applying a worldwide percentage to the EU turnover or you will underpay and get an unpleasant surprise when you make the annual adjustment. Similarly when you change back you should avoid applying the EU only percentage to worldwide turnover or you will overpay. Customs’ policy is that you elect to change at one year end but that nothing changes in practice until the following year end eg you continue to use the old provisional percentage and the election to change has no practical effect for a year. Despite this obligation to gamble, it is clear from several test cases that advance notification is a condition of changing from one method to another (as it is for foreign exchange, below). 60 The EU may be enlarged in 2007 by adding Bulgaria and Rumania. Operators to these destinations need to allow for TOMS in their prices and consider whether to set up a transport company. Turkey may also join later, subject to political uncertainties. Purchases in foreign currencies 61
Purchases in foreign currencies have to be translated into sterling
to get the costs in the accounts and TOMS. In practice the effect
on the TOMS liability is not usually significant but there are considerable
theoretical problems with Customs’ rules. TL4 on page 54 of
709/5/04 offers 5 methods summarised as follows (using Customs’
lettering): 62 If a tour operator buys forward at brochure rates and estimates the amount required reasonably accurately, methods (a) and (b) will produce similar currency costs in the commercial accounts and the TOMS calculation. Some tour operators produce management information on costing rates and use these methods for TOMS. However, the requirement to disclose rates in brochures relates to the currency surcharges prevalent in 1988 and should not affect the TOMS treatment nearly 20 years later. 63 Methods (c) and (e) approximate to actual rates on date of payment. Most tour operators buy forward at least part of their requirements so actual rates may be different. 64 Method (d) appears to equate to the actual cost of currency used. This method may be used to avoid currency differences between the accounts and TOMS. 65 So there is a wide choice of methods but (unlike non EU destinations above) no default so where does a tour operator who has hitherto complied with none of Customs’ methods stand? If you want to use a different method from the previous year, you must notify Customs at the beginning of the year ie no later than the due date of your first VAT return for that year and “Permission will not be granted retrospectively.” 66 A fundamental criticism of Customs’ rules for foreign currencies is that none of the five methods correspond to recognised accountancy standards. Assets and liabilities denominated in foreign currencies are normally translated at closing rates in the accounts at the year end and any adjustment appears in the margin in the accounts, in contravention of all five of Customs’ methods. In practice most tour operators use the cost of sales as shown by the accounts and therefore do not follow any of the methods laid down by Customs. TOMS was designed as an accounts based calculation and, provided the operator is consistent in using the accounts figures, Customs may not challenge this approach. This is the practical solution to the problem. 67 TL4 on page 54 of 709/5/04 is tertiary law ie it has the force of law. Customs’ previous rules on translation of foreign currency were not set out in legal language but it was reasonably clear what was intended. Customs redrafted them into legal language in 1998 so the drafting should now be clear and unambiguous. Unfortunately the new drafting is very disappointing. For example, read method (a): extra words seem to have crept in. If you study the Financial Times you will find that it gives several rates on any one day and method (c) does not say which one is to be used (quite apart from the fact that the rate relates to the day before your payment was made). 68 TOMS is intended primarily to apply to holidays. The UK version of TOMS does not apply to operators who sell to other businesses who then sell on. Such operators are called wholesalers. A typical example is an operator that buys and sells accommodation. It sells the accommodation to a tour operator based in Japan that adds flights and sells a package to Japanese holidaymakers. The VAT Tribunal decided in Norman Allen Group Travel Ltd that TOMS does not apply to wholesale sales. However, different interpretations apply in different countries and the European Commission has proposed amendments to EU legislation which could mean that all wholesalers, including those based in the UK, would have to use TOMS from some future date. 69 Following Norman Allen, Customs ruled that wholesale sales are outside TOMS. Normal rules apply instead. The place of supply of accommodation (the country that can collect output VAT on the sale) is where it is situated. So if the wholesaler sells UK accommodation it pays output VAT and claims input VAT in the normal way. If it sells non UK accommodation it has no UK liability. The VAT Tribunal decision applied to past periods so wholesalers obtained repayments following the Norman Allen decision. 70 If the place of supply is in another country, the wholesaler may be required to register for VAT in that country and if the other country is in the EU, Customs may report this to the authorities in the other country. Other countries have rarely followed up such cases in the past but if they do, the result may well be a larger liability and there may be wider tax implications. The overseas consequences must be considered very carefully. 71 Customs cannot refuse a wholesaler the correct UK VAT treatment merely because the wholesaler has not complied with their obligations in another country. Customs can only report them to the authorities in the other country if it is in the EU. 72 Some wholesalers wanted to stay in TOMS when Customs changed the rules for wholesalers. This might be because their wholesale sales were only a small part of their operations or because their wholesale sales were in the UK and they did not want to or could not operate normal VAT procedures ie calculate output tax by transaction and obtain and retain tax invoices for all purchases. Or if they buy from unregistered suppliers, eg home stay accommodation, TOMS gives a lower liability. Accordingly, wholesalers were allowed to opt to remain in TOMS, subject to obtaining permission from Customs. This is a concession without legal basis. However, wholesalers cannot opt to include some wholesale sales in TOMS and not others (para 3.2, 709/5/04). 73 The VAT treatment outside the UK is not covered in this note but if a wholesaler is liable to register for VAT in another country, choosing to pay more TOMS VAT than is legally due in the UK is unlikely to persuade the other country to drop its claim to collect VAT due under its rules. 74
Sales to another business for consumption by that business (eg conferences,
product launches and incentive travel) are not wholesale sales and
are not covered by Norman Allen. This distinction was not made in
Customs’ initial response to the decision so, from January
1996 to January 1998, sales for consumption by other businesses
were excluded from TOMS with the right to opt back into TOMS (para
8 of 709/5/96). 77 If the supply is in another EU state, Customs may require evidence that you are registered in the other state and are paying output VAT on the income (not, as commonly misunderstood, that you are paying input VAT on the costs). Permission is not required to opt out. If you cannot prove you are paying output tax in the other country the normal UK TOMS liability stands (contrast with the position on wholesale sales where all Customs can do is to report the wholesaler to the other member state: see para 71 above). 78 If the supply is in another country that is not in the EU, there is no requirement to be able to show you are paying output VAT locally. Customs’ permission is not required to exclude such sales from TOMS. The TOMS would of course be zero (non EU). 79 See Notice 709/5/04, section 12, TL1 for the law on supplies to other businesses. 80
In summary: Sales
for Consumption 81 Different countries apply different interpretations of TOMS and in particular of the rules for wholesalers. One effect has been to give UK based wholesalers an advantage over wholesalers based in Germany. Accordingly, the European Commission has proposed amendments to EU legislation which include requiring all wholesalers to use TOMS. The timing and details of the proposed changes to TOMS remain unclear and any changes are likely to take several years. Supplies to local authority schools and Northern Ireland Education Boards 82 Local authority schools may be able to reclaim VAT. In order to allow them to do so, tour operators are allowed to exclude UK trips for such schools from TOMS (para 3.4, 709/5/04). Non UK trips remain in TOMS. Customs’ permission is not required although permission was required until 1998. See TL2, section 12, page 53 of 709/5/04. Agents 83 If a tour operator also makes supplies as agent, the commission should be excluded from TOMS and charged to VAT under general principles. The commission may be standard-rated (the normal situation), exempt (eg arranging insurance), zero-rated (eg arranging zero-rated transport), or outside the scope of UK VAT (eg arranging non UK accommodation). Where the commission is readily identifiable the cost and selling price of agency transactions can both be excluded from the calculation. 84 However, it is not always possible to identify the amount of the commission. For example, many operators sell ferry transport as agent and include the ferry in the package price. How much is the commission in this case? If the amount of the commission is not readily identifiable, the net cost (ie the selling price less the unknown commission) is included in the calculation at step 8 or 9, depending whether the commission is standard-rated (eg on UK car hire or accommodation) or zero-rated (eg on ferry transport or non UK accommodation). See para 2.14 of 709/5/04. Insurance 85 Insurance income and costs are excluded from TOMS but there are important IPT and VAT implications, beyond the scope of this note. Note that the partial exemption rules changed on 1 April 1999 and as a result tour operators can no longer simply ignore their insurance. However, most will not have a problem as their exempt input tax will be below the de minimis limit. Specialist advice may be necessary. Bad debt relief 86 Para 6.8 of 709/5/04 says the bad debt relief is the VAT fraction times the provisional percentage of the bad debt. This method differs from the method used before 1996. The previous method was to deduct the bad debt from the sales in the annual calculation and quantify the reduction in liability. The new method gives a slightly lower amount of bad debt relief but the difference is usually modest. Tax points 87 Most tour operators recognise income on date of departure and TOMS adopts this approach. This is a departure from general principles of VAT, under which receipt of payment or issue of an invoice triggers a tax point. However, there is an option in TOMS to recognise income earlier: para 4.14 of 709/5/04. It will rarely be beneficial to use the earlier tax point rules. The law is in SI 1997/1806. Tax invoices 88 Under TOMS the VAT is calculated at the year end and the amount of VAT in each sale is not known at the time of supply. Customs say that this means that VAT invoices cannot be issued for supplies in TOMS (para 4.20 of 709/5/04). This prevents business customers reclaiming VAT and conflicts with fundamental principles of VAT. The solutions offered by Customs (special rules for supplies to local authority schools and for supplies to other businesses: paras 3.1, 3.3 & 3.4 of 709/5/04) are helpful but not enough. In particular, any wholesaler of UK accommodation etc who remains outside TOMS but buys in from suppliers who have chosen to opt into TOMS will be denied input tax on the purchases despite paying output tax on the full value of the sales. This is wrong and Customs can be challenged if they deny input tax in this situation.
89 Section 10 of 709/5/04 sets out a simplified annual calculation. If all the supplies are standard-rated, the liability is 7/47 of the difference between the sales and purchases. The simplified calculation gives the same answer as the full annual calculation. 90 TL5 on page 55 of 709/5/04 requires operators all of whose supplies are liable at the same rate to use the simplified annual calculation in place of the normal annual calculation. They appear to have no choice. However it is not simple to decide when the simplified calculation applies and it should not be used. The full calculation will always give the right answer but the simplified calculation will give the wrong answer if it is used when it does not apply answer (too great a liability). Do not use it. 91
Other points on the simplified calculation: Discounts 92 Travel agents sometimes discount holidays and take less commission. If they do so without telling the tour operator, the tour operator will assume the usual commission applies and will show too much commission in the accounts. The selling price of the holidays, before commission, will be overstated by an equal and opposite amount so the profit will be right but the TOMS liability will be overstated. Adjusting the TOMS calculations is straightforward once the amount of the discounts is known but determining the level of discounts may not be straightforward. The agents may not have the information to hand. In addition, there are implications for self billing. Following the confused ECJ decision in First Choice Holidays plc, a tour operator cannot adjust for discounts funded by the agent without the knowledge of the tour operator (709/5/04 para 6.1). There is scope for further argument here.
93 The treatment of reps, guides, couriers or tour managers is often muddled. First it is necessary to decide whether there is an inhouse supply. Customs say the cost of more specialist guides can be treated as inhouse and, since guides will normally perform their duties abroad, this will be advantageous. The costs may include amounts paid to the guides and any travel or accommodation costs. Customs do not see the services of less specialist personnel as inhouse and accordingly amounts paid to less specialised employees are not allowed as TOMS costs. However, it does not follow that payments to self employed reps etc or reps’ travel or accommodation costs should be disallowed. These are bought in costs and are allowable if they are for the direct benefit of travellers. Self billing and travel agents’ liability on commissions 94 Many operators sell through travel agents. The agents charge the operators commission and deduct their commission from the amounts they remit to the operator. Without self billing the normal system would be for the agents to send the operators a VAT invoice but under self billing it is the operator who raises the VAT invoice and sends it to the agent. The operator’s paperwork is simplified and they get the input tax deduction sooner than they might otherwise. The travel agent is liable to account for the tax shown on the self billing invoice. Self billing agreements are common in tour operators though they are strictly nothing to do with TOMS. 95 Customs’ prior approval is no longer required before a taxpayer can use self billing but the general conditions set out in VAT Notice 700/62 have to be observed. If a taxpayer does not comply with these conditions they need VAT invoices from the agents before they can claim input tax. The operator must keep the names, addresses and VAT numbers of agents who have agreed to self billing and sign self billing agreements meeting the conditions in 700/62. 96 Travel agents’ commission is zero-rated if they sell flights as agent of the airline. Their commission is standard-rated if they sell holidays as agent of the operator (whether the holiday is to an EU or non EU destination). Travel agents may also sell seat only for a tour operator or consolidator (a consolidator will normally be a tour operator for this purpose). The VAT liability on agents’ commissions on seat only sales changed. Prior to the 1996 change to TOMS, seat only sales were seen as flights and the commission was zero-rated. From 1995 seat only sales are seen as holidays and the commission is standard-rated. See Business Brief 2/96 and Information Sheet 6/96. Notice 709/5 and further reading 97 Read Notice 709/5/04 (first issued 1988, reissued in 1996, 1998 and 2004) which is available from me on request, from your VAT office or from Customs’ web site (www.hmrc.gov.uk). It is a useful summary of TOMS, although it would be improved if it contained numerical examples. There is an error in the main calculation in the 2004 version. The brackets have been omitted at step 21 of the year end calculation on page 47. It should read “(total at step 4 + total at step 14) x the VAT fraction”. 98
Further reading: 99 A problem with 709/5/04 is that the parts that have the force of law are poorly drafted. Previous versions set out Customs’ intent but did not adopt legal language and it was unclear which parts had the force of law. To rectify this, Customs have redrafted and gathered together all the parts that have legal effect in sections 8-12. In the process they have lost the previous clarity of intent, added new uncertainties, introduced retrospective legislation, changed the law without proper notice or consultation and produced unworkable provisions. See for example para 67 above about the translation of purchases in foreign currencies. 100
The tertiary law set out in section 12 of 709/5/04 is summarised
as follows: TL2 Supplies to a local authority – see para 82 above Supplies to a local authority to be enjoyed in the UK may be excluded from TOMS. TL3
Non EU destinations – see para 57 above TL4
Purchases in foreign currencies – see para 61 above TL5
TL6
Definitions Article 26 Sixth VAT Directive 101
Article 26 is the basis of TOMS so it helps to understand it. It
reads as follows: |
Martin Pooley, TOMS VAT Consultant , 70 Sandy Lane, Norwich, NR1 2NR
Tel : 01603 662277 | Fax : 01603 618051 | Email : martin@pooley.co.uk