FAQs: Tour Operators Margin Scheme (TOMS) and VAT

VAT is supposed to tax only the “value added” by a business on the price of the underlying goods or services. It is chargeable and recoverable at each point in the supply chain until the final consumer. Yet for business travel purchased from a travel management company (TMC) using the Tour Operators Margin Scheme (TOMS), exactly the opposite takes place.

In this article, Richard Haye, Director of VAT Reclaim at Ryan, answers the most asked questions about the TOMS scheme and its relationship with UK VAT.

What Is TOMS?

TOMS is a special VAT accounting scheme designed to be applicable to businesses that purchase and resell travel services as part of a tour package. It allows tour operators to not have the requirement to register for VAT in countries where the end users may be travelling. Without it, tour operators could have numerous VAT registration numbers and the required VAT accounting processes and procedures to undertake. Further, this administrative burden does not offer a practical gain to either the tour operator or the individual going on the package holiday (as they are not registered for VAT). In essence, it simplifies the VAT accounting and compliance obligations for businesses operating in the travel industry.

How Does TOMS Work?

Tour operators can use multiple underlying suppliers to provide travel services, for example, airfare, hotel, taxi transfer, all of which they resell at a margin to make their profit for business purposes. Crucially, under TOMS, the margin is the taxable supply on which VAT is due by the tour operator.

It also means the tour operator is blocked from recovering input VAT on the travel services directly used by the end user.

However, if a company is the end user, then they also receive a supply on which no VAT is recoverable. This can prejudice fully taxable businesses as they have the right to recover VAT subject to normal rules.

Who Is Eligible to Use TOMS?

TOMS is specifically designed for businesses that buy and sell travel services as part of a tour package. This includes tour operators, travel agents, and other businesses that package and sell travel services.

What Type of Travel Services Does TOMS Cover?

TOMS covers a wide range of travel services, including accommodation, transportation (such as flights, trains, and buses), and other ancillary services provided as part of a tour package.

How Do Businesses Account for VAT Under TOMS?

Businesses using TOMS must calculate the VAT due on their profit margin and account for it on their VAT return. They are not required to separately account for VAT on the individual components of the tour package. Businesses can determine how they work with their TMC, which can alter the implications. This is determined as to how the travel agent and company organise their relationship and who the underlying travel supplier sees as the customer. In the UK, the terms used are Disclosed Agent and Undisclosed Agent.

As an Undisclosed Agent, the travel agent reserves and pays for the travel supplies and then charges on the multiple underlying supplies as necessary. In this scenario, the underlying supplier, for example a hotel, charges the travel agent and passes on the cost plus their margin. Here’s a simple diagram:

VAT of €28.13 is not recoverable.

A Disclosed Agent is where the TMC defines the final consumer with the travel supplier (hotel in our example). Separately, the travel agent has their supply of travel booking services to the final consumer. Here’s a simple diagram:

VAT recoverable and final consumer, which is a business, can account for €28.13 of input VAT.

Tour operators are an important and necessary part of the travel industry; however, some businesses using a TMC could benefit from looking at how that relationship operates.

Where Can Businesses Find More Information About TOMS and VAT?

Businesses can find more information about TOMS and VAT on the official website of their country’s tax authority – the UK TOMS information can be found here – or by consulting with a tax adviser, such as Ryan, that specialises in VAT for the travel sector.

To explore how Ryan’s tax specialists can support your business with the most recent changes to TOMS and understand how the rules require VAT to be accounted for, simply fill in the form below.