What is TOMS?

The UK Tour Operators’ Margin Scheme (TOMS) is a special VAT accounting regime that applies to businesses in the travel sector that buy in and resell travel services in their own name. Rather than charging VAT on the full selling price to the customer, VAT is accounted for on the operator’s margin. The scheme is mandatory where its conditions are met and is designed to deal with the practical difficulties of applying VAT to multi jurisdictional travel supplies.

For finance teams and advisers in the travel industry, TOMS remains one of the most technically demanding areas of VAT. It affects pricing, profitability, systems, and year end processes, and errors can lead to material VAT exposure.

Why TOMS exists

Under normal VAT rules, a UK business supplying services such as accommodation or passenger transport in another country would often need to register and account for VAT in that country. For tour operators selling holidays made up of multiple overseas components, this would be an administrative and compliance burden.>

TOMS addresses this by:

• Treating a bundle of bought in travel services as a single supply for VAT purposes
• Deeming that supply to take place where the tour operator is established,
• Charging VAT only on the margin made, rather than the full selling price

As a result, VAT is accounted for in the UK on the profit element of a travel sale, avoiding the need for multiple overseas VAT registrations.

TOMS is originally an EU VAT regime, but since Brexit it has remained in UK law. Periods before 1 January 2021 are split between EU and non-EU destinations, whereas from 1 January 2021 it is split between UK and non-UK destinations.

Who is within the scope of TOMS

TOMS applies to VAT registered businesses that meet all the following criteria:

• Buy in certain travel services known as Margin Scheme supplies (such as accommodation, passenger transport, car hire, guides, or excursions)
• Resell those services without material alteration
• Act as principal or as an undisclosed agent (i.e. selling in their own name)
• Supply those services to the traveller or to a customer not reselling them onward

Importantly, a business does not need to describe itself as a “tour operator” for TOMS to apply. Established case law and HMRC guidance makes clear that the scheme can apply equally to travel agents selling as principal, corporate hospitality providers, event and conference organisers, and other businesses whose core activities are not traditional leisure travel.

With a few exceptions, TOMS is compulsory. If a business falls within scope, it must apply the scheme and cannot opt to use normal VAT rules instead.

What supplies fall within TOMS

Designated Margin Scheme supplies include:

• Accommodation
• Passenger transport
• Hire of a means of transport
• Trips or excursions
• Services of tour guides
• Use of special lounges at airports

Other supplies, such as catering, admission tickets or sports facilities, will also be Margin Scheme supplies when supplied with one or more of the above, and are also bought in and sold without material alteration.

VAT incurred on those bought in costs is blocked and cannot be reclaimed.

The time of supply of a TOMS transactions is the departure date. As a result, for cancelled bookings that do not take place but a deposit is kept, the tax point never arises. This means cancellation income is treated outside the scope of VAT.

In house supplies

In house supplies are services that the tour operator provides using its own resources rather than purchasing from third party suppliers. Common examples include operating an owned coach fleet, running a hotel or accommodation facility, or employing staff directly as guides. It can also include where what has been bought in has been materially altered to what is being sold on – an example being a coach hired, a driver hired separately, fuel, etc bought, and a single supply of passenger transport sold on.

When supplied by themselves, these supplies are excluded from the TOMS calculation and must instead be accounted for under the normal VAT rules. This means that output VAT may need to be charged at the appropriate rate on the in house supply, and input VAT may be recoverable in accordance with the usual VAT recovery principles. The place of supply of the transactions also needs to be considered.

However, when supplied with a Margin Scheme supply, all the transaction falls within TOMS. Whilst output VAT is determined by the relevant splitting out of costs in the annual TOMS calculation, input VAT can be recovered on the in-house elements under normal VAT rules.

How VAT is calculated

VAT is paid provisionally throughout the year, based on the value of sales falling in the VAT return period.

An annual calculation is done to determine the allowable margin. This is then split between the UK margin and non-UK margin based on a cost apportionment. The UK margin is standard-rated, and the non-UK margin is zero-rated. The annual adjustment is determined by taking the VAT liability for the year and deducting the provisional payments made. The calculation also provides the provisional percentage to use for the year ahead.

For unregistered businesses whose supplies would fall within TOMS, an important area to be aware of is that when looking at ‘turnover’ for registration purposes, it is the margin, not sales, to use to compare to the threshold (£90,000 as of 1 April 2024).

Transport Company Scheme

The margin on UK supplies is standard-rated – this includes where passenger transport, which is usually zero-rated, is bought in and sold on. In order to mitigate this difference in treatment, HMRC have approved the use of a separate Transport Company to buy in UK transport and sell on at an appropriate mark-up to the main business.

Supplies to businesses and wholesale models

A frequent area of uncertainty is whether TOMS can apply to supplies made to business customers. As of April 2024, HMRC’s position is that wholesale supplies (supplies made B2B for onward sale) are within the scope of TOMS by default, but businesses can opt out, and use normal VAT rules, if they prefer. Where businesses use the supply and do not resell, TOMS will apply provided the standard criteria are met.

EU TOMS

Following the changes from the 1st January 2021, some EU countries are requiring non-EU tour operators to register for VAT locally. We are also aware that the EU is considering reforms to the TOMS regime, and we anticipate changes to the VAT treatment of non-EU tour operators. Depending on the final outcome, these reforms could result in registration obligations in one or more EU Member States. In addition, wider ViDA measures will introduce new platform rules and mandatory e-invoicing requirements. These changes are not yet fully decided and it may take some time before we see any changes.

How MHA can help

MHA has a dedicated VAT travel and tourism team with long standing experience advising tour operators, travel agents, organisers of events and conferences, and other businesses operating within the Tour Operators’ Margin Scheme.

We offer a free, no obligation 30 minute introductory call to discuss:

• How TOMS may apply to your business or specific transactions
• Common problem areas and risk points
• Whether a more detailed review or support would be appropriate

Any such call is intended to be exploratory only and cannot be relied upon as formal VAT advice. Full advice would require a detailed review of your facts and circumstances, supported by an agreed scope of work.

If you would like to arrange an initial discussion, please contact the MHA team here.