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The Tour Operators Margin Scheme: a time of change

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The following article by Deloitte's Tom Walsh originally appeared in ABTA's issue of Travel Law Today - Spring 2022 .

Since its withdrawal from the European Union (EU) on 31 December 2020, the UK has implemented changes to the Tour Operators Margin Scheme (TOMS). These changes have taken effect during a time when the ability of non-EU established entities to apply TOMS in some EU Member States has begun to curtail, with further action expected from the European Commission. The impact for UK members using TOMS is that the UK margin scheme may no longer be relied upon to account for all VAT due on the sale of EU products.

What is TOMS?

TOMS was introduced by the EU in 1977 as a way for businesses to simplify VAT accounting on the onward supply of bought-in travel services.

A primary objective of TOMS was to reduce the complexity of VAT accounting for tour operators by allowing onward supply to be taxed in the tour operator’s place of establishment, thereby removing the obligation for businesses to register for VAT in every EU destination where packages are supplied. The EU TOMS simplification derives from European VAT law and has been implemented in each EU Member State (including the UK up until 2021) through local legislation.

Under TOMS, a business is required to account for VAT on designated margin scheme supplies in the country it is established, even if the services are provided elsewhere (eg a French-established business selling holidays in Spain would account for VAT in France, rather than Spain). Travel businesses without any presence in the EU have historically applied the same principle, meaning that supplies made under TOMS fall outside the scope of EU VAT when supplied by a non-EU tour operator.

Following the UK’s secession from the EU, the concept of TOMS remains under UK VAT law but with changes so that UK tour operators no longer account for UK VAT at a positive rate when selling EU products.

Ongoing review

In recent years, the application of TOMS across the EU has been considered by the European Commission and debated at various VAT working groups but without any legislative changes to its operation.

In February 2020, the European Commission launched a formal evaluation of how TOMS is applied across the EU. The findings were published a year later and highlighted a number of key issues for the Commission, including that ‘the current application of the TOMS does not ensure a level playing field for all travel agents operating within the EU market, including those not established within the EU’.1

While the EU Commission has separately identified the taxation of non-EU established tour operators as an issue, some individual EU Member States have proactively announced or implemented changes to their local application of TOMS ahead of any potential changes to EU VAT law.

Croatia and Germany have already taken steps to restrict non-EU established businesses from applying TOMS.

Against the backdrop of ongoing activity at European Commission level, both Croatia and Germany have taken unilateral action to change the way in which TOMS can apply to non-EU established tour operators. In January 2021, the German Ministry of Finance announced that it would be changing its interpretation of existing TOMS legislation such that non-EU established businesses can no longer rely upon TOMS for supplies made in Germany. Although announced in January 2021, the implementation has been delayed and is now scheduled to take effect from 1 January 2023.

Also in January 2021, Croatia changed its approach to the taxation of non-EU established businesses. Unlike Germany, however, the change in Croatia was effected quickly and provides insight into how the removal of access to the TOMS rules in the EU could impact non-EU established businesses.

Since January 2021, UK travel businesses have been required to register and account for VAT in Croatia in respect of supplies made in Croatia (ie account for Croatian output tax and recover local input tax on individual supplies made or received via a local VAT registration, rather than applying a margin scheme calculation).

If the ability to rely on TOMS is removed across the EU, UK tour operators would be required to undertake the same process in every EU Member State where bought-in travel products are sold in the tour operator’s own name.

In addition to the changes in Croatia and Germany, there have been two recent cases in the Spanish court system that have ruled in favour of TOMS not being applicable for non-EU established businesses.

After a number of years of discussion and debate, it is clear that changes to the application of TOMS are afoot and Member States are exploring (and implementing) options to address the perceived unlevel playing field between EU and non-EU operators, while awaiting any broader legislative changes that will invariably take time when routed through the EU Institutions.

The European Commission is due to undertake a study on the future of TOMS later in the year and is expected to propose changes to the European VAT Directive in 2023, which could set out changes to the scope and mechanisms of TOMS.

Although any EU legislative changes will take time to implement, recent developments in Croatia and Germany point to a problematic trend for ABTA Members. Should more EU Member States take unilateral action to impose local VAT on supplies made by UK-established operators it would serve to increase the cost and uncertainty of selling EU travel products. Our view is that there is a greater need than ever for UK travel businesses to keep abreast of EU VAT law developments and the local tax rules applicable in destination territories.

1. https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/11883-VAT-scheme-for-travel-agents-evaluation-_en

Tom Walsh, Deloitte LLP UK – Partner

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Disclaimer This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London, EC4A 3HQ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

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The Tour Operators’ Margin Scheme for VAT in 2021

Travel, Tourism & Hospitality Community

Author: Sue Rathmell, MHA MacIntyre Hudson

Published: 08 Feb 2021

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Sue Rathmell, VAT Partner with MHA MacIntyre Hudson discusses the changes and their impact.

• The Tour Operators’ Margin Scheme has been changed with effect from 1 January 2021.
• HMRC have reissued TOMS Notice 709/5 here setting out the new TOMS rules.
• The margin on EU and non-EU destinations is now zero-rated. The margin on UK destinations remains standard rated.
• The TOMS calculation will need to change in order to apply 20% VAT to UK destinations only from 1 January 2021 and to apply the temporary 5% VAT rate to accommodation and other tourism and hospitality services in the UK.
• The change will be easier for 31 December year ends but complex for year ends straddling the change.

The margin on EU destinations becomes zero-rated but there is already a sting in the tail in destinations

Margins on EU destinations are zero-rated for departures after 31 December 2020. Operators will need to analyse costs between UK and non-UK destinations from 1 January 2021. However, there is a risk of being required to register in EU destinations and pay over VAT on sales by country.

Indeed the German Ministry of Finance has just announced that with effect from 1 January 2021 non-EU tour operators have to register for VAT in Germany and account for German VAT on transactions that take place in Germany – e.g. travel, river cruises, hotels and accommodation, events and so on. Businesses can recover VAT on the costs of the services they buy in Germany. The registration requirement applies to operators providing services both B2C and B2B.

This is a very worrying announcement and any tour operator with a German program is affected by this. This requirement is very likely to be in response to Brexit and we do not know if other EU countries may follow suit.

Provisional payments will take time to fall

The provisional payments rules have not changed so savings on EU destinations will take years to show in VAT returns. For example, an operator with a November year-end and quarterly returns will make provisional payments during 2020/21 based on 2019/20 when EU margins were standard rated. So they will not see any saving until the annual adjustment to 30 November 2021 goes in the return for period 02/22. And they will pay during 2021/22 based on 2020/21 which includes December 2020 when EU margins were standard rated. So they may not see the full saving until the annual adjustment to 30 November 2022 is processed in period 02/23. We pointed this out to HMRC but the rules have not changed.

The reduced rate

UK hospitality (hotels etc) is taxed at 5% until 31 March 2021. TOMS is still charged at 20% i.e. 1/6 of the margin. Operators will benefit if suppliers pass on the lower VAT rate (under TOMS, operators cannot reclaim VAT on their direct costs). A 15% cut in the cost of sales would be very useful but in practice this measure will not help much if it ends on 31 March 2021, as currently planned, i.e. before business restarts.

However, it may be possible to trigger the VAT on hotels at 5% for holidays after 31 March by pre-invoicing or prepaying, subject to advice. The operator’s contract with the supplier is important in this context. If it is silent on VAT, then the price includes any VAT and the supplier will not be entitled to increase prices if the rate of VAT increases.

The transport company scheme

The transport company scheme in HMRC Info Sheet 1/97 is extra-statutory so Notice 709/5 does not mention it. It seems that it is to continue. Indeed, in the absence of the mooted apportionment method, it will be necessary to prevent large increases in TOMS liabilities on many UK holidays. Operators selling transport to UK destinations may want to retain their transport company. But operators who do not sell UK transport can close their transport companies. First they should finish the current financial year, do the annual calculation, let the management charges work through the VAT returns and tell suppliers to invoice the tour operator instead of the transport company.

Operators who sell both UK and non-UK transport and who wish to continue to use the transport company need to decide whether to continue to buy non-UK transport through the transport company. It may be simpler to continue to buy all transport through the transport company.

It is unclear whether the scheme is to be extended to reduced rate UK hospitality as previously mooted by ABTA.

Inhouse UK accommodation at 5% or 20%

Operators running their own hotels etc in the UK make inhouse supplies. Inhouse supplies fall under normal VAT rules, although the VAT liability on them is worked out by the TOMS calculation. So they benefit from the reduced rate, if Covid allows them to open for business, but what is the tax point and what about the provisional payments?

Strictly speaking normal tax point rules apply, not departure date. So if for example clients pay for a holiday when the rate is 5% but do not travel until it has reverted to 20%, has the VAT on inhouse supplies been triggered at 5%?

Neither the VAT fraction nor the provisional payments rules in 709/5 section 10 have changed. So any rate saving on inhouse hotels will only be seen at annual adjustment, after the year-end. We pointed this out to HMRC and they published section 2.16.4. This does not change the law in section 10 so it achieves nothing but it is clearly intended to permit operators to derive a more appropriate provisional percentage to apply to inhouse supplies during the period of the reduced rate. Operators affected will want to apply 2.16.4 to improve cash flow, even if it is not the law.

Rent to rent operators

Include or exclude non-uk destinations.

Until 2021, operators paid TOMS on the margin apportioned by the year-end calculation to the cost of EU destinations (including UK). Non-EU sales and costs were normally included in the calculation and the margin apportioned to non-EU costs was zero-rated. HMRC allowed operators to use the EU only method rather than the worldwide method (which was the default). However (i) it was rarely advantageous to do so as percentage margins were normally lower on non-EU destinations due to commercial factors and (ii) operators wishing to use the EU only method had to elect irrevocably a year in advance, before they knew how the margins would work out, which was a gamble.

Under the new Notice, operators have a similar choice between a UK only calculation and a worldwide calculation. But it remains to be seen how percentage margins in different destinations compare in future. Commercial factors suggest higher percentage margins on UK destinations but historical data is not available, markets are being rocked by Covid 19 and may in future be affected by Brexit so it is unclear which method is likely to be cheaper in future. Meanwhile it is no longer reasonable to assume that the default worldwide method is likely to be cheaper.

Operators wishing to change from the worldwide method to UK only or back must notify HMRC before the due date for the first return in that financial year. For example, if their year-end is 30 September 2020 and they submit quarterly returns aligned with the year-end, they have until 31 January 2021 to notify HMRC if they wish to use the UK only method for the calculation to September 2021. HMRC apply this time limit strictly.

Sue Rathmell can be contacted via email .

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Uk vat- brexit and the tour operators’ margin scheme.

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As the UK begins to issue the "green light" for several tourist destinations, travel agents have seen a resurgence in bookings. At the same time, they should be aware of several UK VAT changes, including implications of changes to the Tour Operator Margin Scheme (TOMS) resulting from Brexit and an interim reduced VAT rate for particular tourism and leisure activities.

UK and European flag together

Brexit- retention of the Tour Operators' Margin Scheme

The Tour Operators' Margin Scheme (TOMS) is an EU VAT simplification that prevents EU businesses from having to register in each country they operate in. Companies will have welcomed the fact that Brexit has not resulted in a withdrawal of the scheme, and they can continue to account for VAT using TOMS. 

TOMS is applicable for UK businesses that make a single package supply of travel and hospitality either in the UK or EU, such as (but not limited to) accommodation, passenger transport & trips. UK VAT is paid on the margin made between the package's total cost and sales price to the end consumer. This was previously charged at 20% for all supplies under the scheme. A frequent area of confusion is when a supplier only provides access to an event and does not provide a package of services. In such situations, the supplier is unlikely to be operating within TOMS. 

Under the new UK TOMS rules, only supplies made for packages within the UK will be subject to UK VAT at 20%. Packages sold where the trip is in the EU are now subject to UK VAT at 0% instead of 20%. These packages still need to be calculated under TOMS despite a rate of 0% being applied; however, the benefit will be that VAT is not payable to HMRC, despite there being a taxable supply. 

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Extension of the reduced rate of VAT

In addition to the changes to EU TOMS supplies, HMRC has extended the reduced rate of VAT for hospitality and tourism to 30 September 2021. This applies to supplies such as accommodation, catering, trips, etc. This came into force to try to provide financial support to businesses reopening during the COVID-19 pandemic.

HMRC has confirmed that this reduced rate will be extended further, from 1 October 2021 to 31 March 2022, but will have a new rate of 12.5% instead of 5%. Although this does not impact the rate of VAT charged on TOMS supplies, the reduced rate will impact the margin calculated using TOMS, assuming VAT savings are passed on by the supplier, as the margin is calculated by reference to the VAT inclusive purchase price. 

Call to action

TOMS is a complicated area of VAT law that is easy to get wrong, and businesses should familiarise themselves with the new changes to TOMS in detail to understand how they may affect their supplies. In addition, those involved with events should clarify whether their supplies fall under TOMS, which is only the case when packaged with other margin supplies

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The Tour Operators Margin Scheme (TOMS)

· Posted on: October 19th 2012 · read

What is the TOMS?

The TOMS is a compulsory VAT accounting simplification measure for any supplier who buys in and resells certain (designated) travel services, as a principal or undisclosed agent, without material alteration. It applies to sales to consumers only and not wholesale B2B sales. Designated travel services are accommodation, passenger transport, trips or excursions, hire of a means of transport and the use of airport lounges or tour guides.

It can apply to the sale of a single designated travel service as well as a package. Some other types of supply, theatre/attraction/sports event tickets and catering will be in the TOMS if these are sold with a designated travel service. It also applies to any business or organisation selling designated travel services and not just tour operators and travel agents.

VAT is payable where the supplier is established (so a UK supplier will account for UK VAT) rather than where the service is consumed. Otherwise, under the normal EU VAT rules, suppliers could have a liability to register and account for VAT in each EU member state where any travel service is consumed.

VAT is due on the Margin (the difference between the selling price and the cost of the relevant travel service). Standard rated VAT is due on services consumed in the EU and zero rated VAT applies to services consumed outside the EU. Suppliers established outside the EU will not be liable to pay any EU VAT even if the customer is in the EU and the service is consumed in the EU (although this is subject to ongoing review by the EU Commission).

The TOMS VAT liability is calculated on an annual financial year basis but suppliers are required to pay an estimated (provisional) amount of anticipated VAT during the financial year itself.

A concession applies to supplier’s sales of designated travel services which are, or are anticipated to be less than 1% of the total business turnover in the year. However, this does not apply if the sales are of accommodation or passenger transport.

VAT invoices must be issued for supplies (liable to the TOMS) to business customers (i.e. for business travel). However, instead of recording the amount of VAT due, the supplier must state that “the supplies are subject to the Tour Operators Margin Scheme” or words to that effect. As a result, business customers will not be able to recover any VAT included in the price.

What is not in the TOMS?

As noted above, the TOMS is not applicable to wholesale sales (B2B for onward supply by the buyer). Instead any VAT is due under the normal EU VAT place of supply rules and the supplier could be liable to register and account for VAT elsewhere in the EU (if the service is deemed to be subject to VAT in another EU Member State).

In addition, the services of a wholly disclosed agent, who is selling on behalf of another named travel service supplier, will not be liable to the TOMS. The supply by the travel service supplier may be. However, the agent’s services will be liable to VAT under the normal VAT rules, including any booking admin and credit/debit card fees charged to the consumer, as well as commission charged/due from the supplier.

Supplies from own assets or where there is a material alteration are also not liable to VAT under the TOMS. These are called in-house supplies. This includes supplies of hotel accommodation by hotel owners and supplies of flights by an airline, as well as conferences or events created by the organiser. Material alteration can include where a tour operator charters an aircraft for a season, or leases a hotel, and then contracts with a separate supplier for catering, crew or staff etc. These will then become supplies of passenger transport or hotel accommodation. As with wholesale supplies, any VAT is due under the normal EU VAT place of supply rules and the supplier could be liable to register and account for VAT elsewhere in the EU (if the service is deemed to be subject to VAT in another EU Member State). Where the supply is treated as taking place in the UK, VAT may be due at either the standard rate (i.e. hotel accommodation) or the zero rate (passenger transport).

Where a supplier sells a single price package made up of both a TOMS and an in-house supply, special rules apply to the TOMS calculation. The value used to calculate the proportion of the price for the in-house part or parts (where any VAT is then due under the normal rules) is the Open Market Value based on what the price would be if that part was sold on its own. If it would not be sold on its own then a value can be calculated through the cost apportionment process applied by the standard TOMS calculation method.

Mitigating any UK VAT payable under TOMS

The standard TOMS calculation method is the Global method where both EU and non-EU sales and costs are recorded through a single calculation. Where the actual margin on the EU sales is greater than on non-EU sales, part of the EU margin will be treated as non-EU part when calculating the VAT due. Where it is the other way around, then a split calculation method can limit any VAT payable on the EU margin only. 

Under the TOMS, the margin on any EU passenger transport element will be subject to standard rated UK VAT. However, there are three ways of structuring the sales so that UK zero rating can apply. The most commonly used is the Transport Company Option (using a subsidiary to buy in and wholesale the passenger transport to the tour operator). However, there are two others, the Agency Option (being a disclosed agent) and the Charter Option (creating an in-house supply by chartering an aircraft/leasing a coach and contracting separately for staff/maintenance/catering etc).

Lastly, as noted above, if a supply of travel services otherwise liable to TOMS in the EU is made by a supplier established outside of the EU, this will be taxed by reference to where the supplier is established. Therefore, unless the country of establishment outside the EU requires VAT to be paid on supplies in the EU the sales will not be subject to VAT.

Click here to get in touch with the team for advice and to discuss how this might apply to your business.

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Tour Operators Margin Scheme (TOMS)

Recent news

27 June 2023 | Germany has postponed proposed changes in its VAT treatment of non-EU sales. More information here .

How tourism is taxed is the most influential factor on business viability. The added value of intermediation is often poorly understood. Regarding VAT, the EU is at a disadvantage for three reasons: it taxes tourism exports, the price of holidays to non-EU destinations is VAT-free, and there is additional complexity due to the range of rates applicable (discounted VAT has been shown to support job-generation).

VAT reporting and collection is complicated in a business where costs are spread over many countries, among multiple service types, with buyers in the EU or worldwide. The Tour Operators Margin Scheme (TOMS) remains an intelligent simplification: it shares tax benefit between destination and EU operator’s country of establishment; it minimises the need for multiple registration; it is relatively easy to administer.

However, TOMS still taxes exports to non-EU clients. It does not apply to non-EU businesses selling EU product (there is very little volume in retail sales of EU travel product to non-EU consumers). Relocation driven by tax efficiency is often not open to small businesses. The service of packaging is often not understood as taking place where consumer or client are located, rather than where the package itself is delivered.

What you need to know

• The EU is reviewing how VAT should apply to travel and tourism: significant change is likely
• Understanding of how the travel trade works is often insufficient among policy makers
• There is an urgent need to illustrate the impact of options on business, EU and non-EU
• Publicly-funded tourism bodies cannot easily object to government policy

For note on UK application of TOMS from 2021, see Elman Wall newsletter .

ETOA’s policy objectives

• Exports of tourism products and services should not be taxed in destination
• Value-adding should be encouraged, among businesses of all sizes
• Ease of compliance, with better consultation and notice of change

What we are doing

• Lobbying and participation in expert group on legislative review
• Expert advice through seminars, online briefings and helpline
• Research and reports

Reforming TOMS: updates

July 2023: ETOA’s current understanding is that, owing the linkage between TOMS VAT reform, duty free tax arrangements and passenger transport tax within a single legislative package, and the Commission’s current focus on VAT in the digital age, a new legislative proposal affecting TOMS may not be published until after mid-2024 EU elections at the earliest.

March 2023:  The EC’s VAT committee notes that: “ The study launched to assess the functioning of the VAT rules applicable to travel and tourism sectors and to develop options for the simplification and modernisation of those rules is to be finalised shortly. Decision has been taken to pause the work for the time being which is the reason why the public consultation, planned for the end of 2022/ beginning of 2023, has not been launched yet. A legislative initiative is still on the Agenda for next year.” [source:  Minutes of VAT Committee 20 March 2023 ]

October 2022: EC publishes discussion document outlining options for change. Regulatory proposals are expected in 2023.

January 2022: ETOA and partners publish a common industry position on options for reform.

February 2021: The EU published factual report of 2020 consultation.

May 2020: The European Commission launched public consultation on future policy options.

April 2020: The European Commission published a roadmap setting out scope of policy review.

Tax reform is complex. At an EU level, significant regulatory change requires unanimity among all member states. Tax on tourism makes sense if it improves infrastructure and service. Looking after and making accessible Europe’s cultural and natural heritage requires funding. Taxation without benefit to the taxpayer may bring short-term relief to hard-pressed budgets, but it will cause long-term competitive harm.

TOURISM TAX RATES

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Tax and tourism: a destination management problem? February 2019

Position paper giving European perspective in response to proposed new tourism tax in Scotland. Also mentions Amsterdam, Barcelona, Edinburgh, Florence, Rome and Paris.

Download now

Changes to German VAT from 2023: ETOA Briefing

This 2-page briefing explains what is proposed, who will be affected and what the implications will be, how the legislation will be imposed and what the practical objections are.

Tour Operators Margin Scheme (TOMS) ― overview

This guidance note provides an overview of the Tour Operators Margin Scheme (TOMS) and links to further guidance on the subject.

For more detailed commentary on the TOMS, see De Voil Indirect Tax Service V3.591–V3.594.

What is the TOMS?

The TOMS is a mandatory VAT accounting scheme which is used by businesses based in the UK which buy in and resell travel-related services such as:

accommodation

passenger transport

services of tour guides

SI 1987/1806; Notice 709/5, para 2.9

These kinds of service are sometimes referred as ‘designated travel services’ or ‘margin scheme supplies’.

The UK TOMS is based upon a European-wide

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Tour Operators' Margin Scheme (TOMS VAT)

A GUIDE TO THE TOUR OPERATORS MARGIN SCHEME FOR VAT

I am an independent accountant specialising in the Tour Operators’ Margin Scheme and am well known in the travel trade and HMRC. 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 HMRC Notice 709/5.

What is TOMS? Suppose you pay a hotel inParis £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 theUK.

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. In my experience, many operators overpay TOMS and the scope for repayment claims should not be underestimated.

TOMS in one page

Introduction, the annual calculation, the provisional percentage and annual adjustment, the 1996 increase, vat on margin on eu transport, inhouse supplies, non eu destinations, worldwide or eu only method, supplies to other businesses, other special situations, notice 709/5 and further reading.

Appendices in Excel available from my website

Does TOMS apply to this transaction? See flowchart:

http://www.pooley.co.uk/TOMS_flowchart.pdf

Excel spreadsheet example showing:

• a typical P&L a/c
• the derivation of the TOMS numbers from the P&L a/c
• the resulting annual TOMS calculation
• the margin reconciliation
• `the Newco mark up calculation and
• how to calculate the provisional payments next year

http://www.pooley.co.uk/toms_notes_excel.pdf

These notes are no substitute for advice on a particular situation. No liability can be accepted for action taken or not taken on these notes.

Copyright MHA MacIntyre Hudson 2020

1 You should use TOMS if you buy in and resell accommodation, passenger transport, car hire, trips/excursions, guides or airport lounges as principal to a consumer.  TOMS is better than 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 destinations. You cannot reclaimUKor 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:

This apportionment pro rata cost is fundamental to TOMS however unrealistic it may be.

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:

6 The margin apportioned to EU passenger transport became taxable in 1996. The typical increase in the TOMS liability was about 50%. You can avoid this increase by setting up a transport company with its own VAT number, TRA 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. HMRC go along with this.

7 The margin on insurance is exempt. Cancellation income is not liable to VAT.

8 There are many special situations eg if you sell to another business, if you make inhouse supplies or 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 Martin.

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, collect 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 VAT should the operator pay? Where? And what about the flights?

3 TOMS is an EU wide simplification measure to avoid these problems and to 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 and even if the supply is not a holiday but eg a conference.

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 not in the destination. They do not register for VAT in the destination and cannot deduct input VAT on the corresponding direct costs, even if the destination is in the UK. In effect they pay 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 destinations is standard-rated.

6 Note that the sales and cost of sales are both VAT inclusive so the rate of VAT is not 20% but 1/6 (20%/120%) (previously 7/47 ie 17.5%/117.5%).

7 TOMS is a cost based apportionment and assumes that the tour operator makes the same percentage margin on all products. If margins differ significantly between products, this assumption can affect the liability. For example:

• If the percentage margins inside and outside the EU are different when it may, rarely, be beneficial to elect to use the EU only method (see para 72).
• Where a mixture of supplies with different liabilities is sold in a package. For example if you supply bought in transport with inhouse accommodation.

8 This arbitrary approach has advantages, in particular most operators pay less because they include non EU destinations, but it makes it more difficult to see what is going on. If TOMS were calculated transaction by transaction it would require more detailed record keeping but the VAT on each transaction would be easy to understand.

9 For a fuller understanding of TOMS you should read EU law Articles 306-310 of the Principal VAT Directive Dir 2006/112 (reproduced at para 122 below). As usual, EU legislation is clearer than UK legislation so you should read it before you read UK law (and references to Articles in these notes are to the Principal VAT Directive). You could then read The VAT (Tour Operators) Order 1987 (SI 1987/1806) but for most the starting point will be HMRC Notice 709/5/2009 (last issued in 2009).  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 40) and the treatment of supplies to other businesses changed in 1996, 1998 and 2010 (see para 83).

10 There has long been discussion of possible reform of TOMS by the EU but until there is some agreement there will be no change. The most important change is likely to be that the transport company scheme would cease to work. This would hurt small operators. Meanwhile the business world has changed and TOMS is still struggling to cope with dot.com operators and the market changes flowing from low cost carriers. . The changes to B2B supplies in 2010 are also proving problematic.

When does TOMS apply?

11 You decide the VAT treatment of every transaction on its merits. TOMS applies to a transaction if and only if (1) you are making one or more margin scheme supplies (see para 13 below) and (2) you do so as principal (not as agent: para 14) and (3) you buy in these supplies (not inhouse: para 15) and (4) you sell these supplies to a consumer (not wholesale: para 16).  See flowchart at http://www.pooley.co.uk/TOMS_flowchart.pdf

12 TOMS applies even if a margin scheme supply is sold singly ie there is no need for there to be a package.  TOMS applies to UK destinations just as much as to destinations in other countries, EU or non EU. When you have identified all the transactions that are in TOMS you aggregate them and do one annual calculation.  Many tour operators will find all their sales are in TOMS so they just take totals from the P&L.

13 TOMS only applies to a transaction when the transaction includes one or more margin scheme supplies. HMRC 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 into 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 single transaction with one or more of the supplies listed above.

14 TOMS only applies to a transaction where you act as a principal ie not when you act as a disclosed agent. Agency is a particularly difficult area and if there is any doubt about the position, take proper advice. See para 97 below for agency in more detail.

15 TOMS only applies to bought in supplies as opposed to inhouse supplies.  Inhouse supplies are supplies from your own resources.  If for example you own coaches, employ drivers, pay hotels and sell coach tours, the hotel is bought in but the coach transport is an inhouse supply.  You include the whole transaction in TOMS because it includes a TOMS supply. If you supply coach only and use your own coaches, it is not in TOMS and is normal passenger transport.  Conversely if you supply coach only and the coach is bought in, it is in TOMS. See para 57 for more on inhouse supplies.

16 TOMS only applies to supplies to the consumer ie traveller.  If you sell to another business for resale by them, eg your client is another tour operator, your client is not the traveller and your supply is wholesale and is not in TOMS.  Normal VAT rules apply instead. If you are selling through a travel agent, you will normally be selling to the traveller though these traditional lines are increasingly blurred.  If you sell to another business and they use it for their staff or to entertain clients, your client is seen as the consumer and the transaction is in TOMS.  Until 31 December 2009 there were various opt outs and opt ins in relation to supplies to other businesses but now there is no choice.

17 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.

How does TOMS differ from normal VAT rules?

18 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), accounts to HMRC for the output tax, pays suppliers VAT on purchases (input tax) and reclaims the input tax. Under TOMS, the taxpayer accounts to HMRC for output tax on the margin. Input tax on costs of sales is not deductible. Input tax on overheads is deductible 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 709/5/2009).

19 Under normal VAT rules, the time of supply or tax point (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 is the departure date of the holiday.

20 Under normal VAT rules, the place of supply (which determines which government is entitled to collect the output tax) for accommodation is where the property is located (Dir 2006/112, Art 47), for transport where it takes place proportionate to the distances covered (Art 48), for car hire where it is put at the disposal of the customer (Art 56) and for catering where it is physically carried out (Art 55) (unless on a ship).  So most tour operators’ supplies would be taxable in the destination country if there were no special scheme for them.  Under TOMS, the place of supply is instead where the operator is established.  So that is one VAT return to complete instead of up to 28.

21 Under normal VAT rules, the liability of the supply (rate of output tax) depends on the nature of the supply. Under TOMS, the liability depends on the destination. The margin on non EU holidays is zero-rated. In addition, under the transport company scheme, in effect the liability depends on the nature of the underlying cost (see para 45).

22 The UK has implemented TOMS as an annual cost based apportionment calculation. It takes the gross profit in the statutory 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.

23 The margin apportioned to non EU destinations 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.  Just think of what this does for employment in the EU and for our carbon footprint.

24 The margin apportioned to EU accommodation is standard-rated. Similarly for EU meals, car hire, excursions etc.

25 The margin on transport to EU destinations is standard-rated but was zero-rated under UK law until 1996. The change was forced on the UK to bring it into line with EU law. HMRC have approved methods to mitigate this increase and most tour operators with EU programmes have set up transport companies to do so. See para 45 below.

26 Costs are described by TOMS 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.  Do not confuse this with the rate of VAT charged by the supplier!

27 The annual calculation is in a standard layout which must be followed. HMRC Leaflet 709/5/1988 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 HMRC Information Sheets so a hybrid is used in these notes: A(1) means A in 1988 algebra and step 1 in the latest Notice. The numbering in the Notices has changed over the years while the algebra has remained the same which is another reason for preferring algebra.

28 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 including surcharges for payment by credit card or for changes to the holiday.  The income should be reduced by deducting insurance at selling price, any retained deposits or cancellation income and compensation payments.

29 The other letters are used as follows:

B(2) = standard-rated costs, eg EU accommodation + EU transport from January 1996.

C(3) = zero-rated costs, eg non EU costs + EU transport to December 1995.

D(4) = inhouse standard-rated costs, eg an owned hotel in the UK.

E(5) = inhouse zero-rated costs, eg your own coaching.

E(6) = inhouse exempt costs, eg your own EFL operation.

F(7) = inhouse non UK costs, eg your own hotel in France.

B(8) = agency costs where the margin is not readily identifiable but is standard-rated.

C(9) = agency costs where the margin is not readily identifiable and not standard-rated.

G(10) = total cost of sales eg B+C+D+E+F or steps 2 through 9.

Most operators only need three numbers (A(1), B(2) and C(3)) and most examples in this note use only these numbers. Inhouse supplies (D(4), E(5&6) & F(7)) and agency costs (B(8) & C(9)) are unusual.

30 Example: a typical annual calculation without inhouse supplies

31 See http://www.pooley.co.uk/toms_notes_excel.pdf for an Excel spreadsheet showing how the annual calculation relates to the accounts and including inhouse supplies.

32 It is important to check the annual calculation by reconciling the TOMS margin to the gross profit in the accounts. The main 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 which is normally deducted from turnover in the accounts.  See example in my spreadsheet.

33 The rest of the calculation is used to derive 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) = (1/6) 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) = (1/6) x D(4) x A(1)/G(10).

34 Inhouse supplies are from January 2010 to be taxed on their market value, where possible, instead of at cost plus average margin as determined by the TOMS calculation. Accordingly there is an additional market value calculation with steps numbered M1 to M5.  See para 67.  In practice market values are rarely available and the cost plus method is still used most of the time.

35 The annual calculation is only carried out at the end of the year so operators have to estimate the output tax in the intervening returns. 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 provisional standard-rated margin is the same proportion of sales as the previous year. Apply the VAT fraction to this margin to get the provisional TOMS. When the VAT rate changes, as it did at 30 November 2008, 31 December 2009 & 3 January 2011, the provisional TOMS payable is the VAT fraction based on the rate of VAT at the date of departure times the provisional margin.

36 When the operator completes 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 first 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 2013 and makes quarterly VAT returns to the same date, the annual adjustment based on the 2013 accounts should be made in the return for March 2014 which is due by 30 April 2014.

37 Alternatively, if the operator makes monthly returns, the 2013 adjustment belongs in the January 2014 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 2014 return so if any later adjustment is more than the de minimis, normally £10,000, it should be disclosed separately to HMRC.  Late adjustments are to be avoided if at all possible.  If you have underpaid, HMRC will charge interest and possibly penalties.  If you have overpaid, you may have trouble persuading HMRC to process the adjustment, they may charge penalties and meanwhile you are out of pocket.

38 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 2013 and a return ends on 31 February 2014, the 2013 adjustment should go in that return.  If your VAT returns do not coincide with the year end, log onto your VAT account and bring them into line.  This makes the calculations easier and gives you longer to do them. 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.

39 Going through the usual boxes on the tour operator’s VAT return:

• Box 1 = VAT fraction x provisional percentage x sales departures in the period + annual adjustment, if it is the first return after the year end
• Box 4 = input tax on agents’ commissions and other overheads, not cost of sales
• Box 6 = estimated margin, not sales
• Box 7 = overheads, not cost of sales.

Inhouse supplies are more complicated. For a complete analysis, see the third work sheet in the spreadsheet available with these notes.

40 The treatment of EU transport changed in 1996. Until 31 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).

41 Example: the 1996 increase

42 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%.

43 HMRC 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:

• Use a transport company. See para 45.
• Act as agent for the transport supplier. See para 52.
• Convert bought in flights to inhouse transport.

44 The first method is used by most 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. See HMRC Information Sheet 03/96 (no longer on HMRC website but copy available from me).  The first two are discussed below.

Using a transport company to mitigate the 1996 increase

45 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. HMRC accept Newco is wholesaling zero-rated transport and has no TOMS liability. See HMRC Information Sheet 1/97 (no longer on HMRC website but copy available from me). However, pressure from the EU may force the UK to withdraw this facility.

46 The more margin earned in Newco the less TOMS is payable in Oldco. HMRC 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.  In practice, if you are using the transport company scheme it is much easier to do all the calculations under the old rules and confine the transport mark up to the year end process.

47 The mark up can be found by trial and error or formula. Use my spreadsheet at http://www.pooley.co.uk/toms_notes_excel.pdf or my algebra published 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.

48 Example:

* = 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 but not with the rate of VAT.  See the example in the spreadsheet on my website.

49 Newco will earn a margin on the transport and can be charged a management charge for services from Oldco to put the margin back where it belongs. HMRC assisted in the design of the transport company scheme and continue to support it. Despite this support, there may be corporation tax implications if there are losses brought forward and there may well be a restriction of small companies’ relief for corporation tax. There may also be bonding and licensing implications but these and other wider tax and commercial implications of using Newco are beyond the scope of these notes.

50 The main points on the transport company are as follows:

• Newco should be VAT registered and not in a VAT group with Oldco.
• Newco should have a TRA ATOL (if flights are involved).
• Airlines and other suppliers should be informed that they are dealing with Newco.
• Transport suppliers should invoice Newco.
• Newco and Oldco should draw up a contract for the sale of transport.
• Non EU transport should normally go through Newco, not just EU transport.
• The TOMS liability is calculated from the accounts, under the new rules, so the transport mark up must go through the accounts for the saving to be achieved.
• Any corresponding management charge from Oldco to Newco is liable to VAT.
• See HMRC Information Sheet 1/97 (no longer on HMRC website but copy available from me).

51 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 doing 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

52 HMRC say that agency supplies are outside TOMS provided:

• the agency agreement is genuine - in particular, a true agent would not be expected to take any significant commercial risk ie the agent should not commit to buy before selling
• agents do not act in their own name - an arrangement whereby the principal remains undisclosed to the customer would not satisfy this condition
• there is documentary evidence to support any agency agreement ie both parties must agree, preferably evidenced in writing, and
• clear statements are included in the terms and conditions of the contract with the customer that the transport is supplied as agent and naming the principal.

53 HMRC 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, and if it is for arranging transport the commission is usually zero-rated.

54 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.

55 Where the agency commission is readily identifiable the cost and selling price of the agency supply 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 (no longer on HMRC website but copy available from me) and Notice 709/5/2009 para 6.7. 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.

56 Adopting an agency structure will fundamentally change the operator’s contractual relationships with customers and suppliers. There are wider commercial and legal implications and it is not to be done lightly.  Most tour operators selling flights will not be able to use the agency solution as explained at paragraph 54 above.

57 Inhouse supplies are when you provide the service from your own resources, eg you own coaches & pay the drivers rather than buying in coaching from a coach company.  Or you may run your own ski chalets or your own hotels. In addition, HMRC 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: see para 65.

58 If a transaction involves inhouse supplies but no bought in supplies, TOMS does not apply to the transaction in question. Normal VAT rules apply instead. Eg a coach operator sells coach holidays but also sells coach only: the latter is passenger transport and is not in TOMS. Or if you sell inhouse coach transport plus admission eg a day trip, TOMS does not apply to the day trip as there is no bought in margin scheme supply.

59 If a transaction involves both bought in margin scheme supplies and inhouse supplies, it is included in the annual calculation and TOMS works out any VAT due on the inhouse supply.

60 General principles of VAT apply to inhouse supplies rather than 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.  Inhouse supplies fall into four categories dealt with in turn below, corresponding to steps 4, 5, 6 and 7 in the calculation.  Following the ECJ decision in MyTravel, from 1 January 2010, where possible inhouse supplies are taxed at market value, under normal rules outside TOMS in effect (see para 67), but in practice many will remain in TOMS and will therefore continue to be valued at cost plus average margin.

61 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 the selling price of the hotel, not the margin. Unless the new market value rules apply, 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, VAT is added to the VAT exclusive costs (at the normal rate, currently 20%).

62 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. Unless the new market value rules apply, 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 tightened up and operators must have a certificate of registration for Mehrwertsteuer before they send coaches to Germany. River cruises similarly and Austria increasingly. This is normal VAT, like the VAT the German hotels charge, is not TOMS, is not deductible and is not contrary to EU law (Art 48: the place of supply is where the transport takes place).

63 E(6) If an operator runs a school teaching EFL (English as a Foreign Language) it is inhouse exempt. Unless the new market value rules apply, 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. Partial exemption calculations are needed to determine how much input tax is deductible, assuming the operator is VAT registered.

64 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 is presumably liable to register in the other country so the income is not taxed in the UK. Unless the new market value rules apply, 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 local rate applicable if VAT registered locally and accounting for output VAT on the corresponding sales to the overseas authorities.

65 HMRC 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 (709/5/2009, para 7.13).

66 Unless the new market value rules apply, the selling price is assumed to be cost plus margin calculated pro rata. Depending where the conference takes place the supply may be a standard-rated inhouse supply and the costs appear at step D(4) plus notional VAT (eg 20%) or outside the scope of UK VAT, ie treated as zero-rated, and the costs appear at F(7). Add notional VAT to overseas costs at the rate applicable locally if VAT registered locally and required to pay local output VAT on sales.

Market value

67 When TOMS was introduced in 1988, all inhouse supplies were included in TOMS at cost ie TOMS assumed that the selling price was cost plus the average margin.  Following the ECJ decision in MyTravel the UK was forced to introduce market values and from 31 December 2009 there is a new market value calculation at section 8 of 709/5/2009. See HMRC Brief 27/09. The principle is that the market value of the inhouse supply is deducted from the selling price of the TOMS supplies and taxed under normal rules. In general market value is to be used rather than cost but it may be difficult to identify the market value so many inhouse supplies will continue to fall under the cost plus rules. In MyTravel, the company was selling flights on a seat only basis as well as in package holidays and it was relatively easy to take the market value of the flights from the selling price of the package to get the sales value of the TOMS supply. It remains to be seen how many operators will be able to use market value and HMRC are known to oppose the use of market value by coach tour operators in particular. See below. Any operator with inhouse supplies should take proper advice on their situation.

68 In the Welsh’s Coaches Ltd case, the VAT Tribunal rejected the market values put forward by the company for the coach element of the package holiday, based on prices for similar journeys quoted by National Express. Coach tour operators may also sell private hire or make other coach only supplies but these supplies will rarely be comparable with the coaching included in a tour. For example, a private hire contract is for the supply of a whole coach and the hirer takes any risk that the coach is half empty whereas package holidays are sold seat by seat and the tour operator takes the risk that the holiday does not sell well. The coach operator is unlikely to publish a price at which they would be willing to, for example, pick up an individual from a collection point, take them to the coach depot, drive them to a hotel in Cornwall and back a week later and to provide excursions in the intervening days but no hotel room. National Express will only do the city to city part and will probably charge more than the coach tour operator allows in the costings so that if market values could be established the coach operator would pay less TOMS. This is what you would expect as return follows risk and the coach tour operator takes no risk on hotel rooms and all the risk on the coach going out half empty.

69 Where some inhouse supplies are taxed at market value and some are left in TOMS, the costs left in TOMS must relate to the sales left in TOMS or the calculation will not reflect the margin. So the costs at D (step 4), E (5/6) & F (7) may need to be apportioned between supplies in TOMS and supplies taxed at market value.

70 Other practical problems with inhouse supplies are as follows:

• Is it beneficial to have a high value (eg zero-rated transport or supplies outside the scope of UK VAT) or a low value (eg UK standard-rated inhouse)? It would be desirable to aim for consistency of approach.
• The corresponding VAT treatment in other countries: other member states may not use the same criteria as the UK to determine what is inhouse and will invariably use a different method to determine the value of the supply.
• How to deal with coaching costs when the operator uses the same vehicles for private hire. HMRC say the costs should be apportioned on mileage but this undervalues the transport element. More valuable coaches tend to be bought for tours and may only be used for private hire when not required for tours. In many ways it would be more logical to include private hire in TOMS.
• How to treat subsidiaries incorporated in foreign countries: typically a ski chalet in France may be owned by a French legal entity.
• How to deal with local sales eg ski packs sold in resort by a chalet operator: is it fair to tax them under TOMS if they are included in the local VAT return?
• The addition of notional VAT to inhouse costs (step 7 of section 9 of Notice 709/5/2009): there is more than one rate of VAT in France, for example.

71 After enlargement in 2007, the EU consists of 27 countries: Austria, Belgium, Bulgaria, Cyprus (excl the part under Turkish control), The Czech Republic, Denmark (excl the Faroes), Estonia, Finland (excluding the Åland Islands), France (incl Monaco but excl Guadeloupe, Martinique, Réunion, St Pierre and Miquelon and French Guiana), Germany (excl Busingen and the Isle of Heligoland), Greece (excl Mount Athos), Hungary, Ireland, Italy (excl the communes of Livigno and Campione d’Italia and the Italian waters of Lake Lugano), Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal (incl the Azores and Madeira), Rumania, Slovakia, Slovenia, Spain (incl the Balearic Islands but excl the Canaries, Ceuta & Melilla), Sweden and the UK (incl the Isle of Man). It excludes Norway, 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, Cape Verde, Gibraltar, Greenland, Iceland, Liechtenstein, Montenegro, San Marino and The Vatican City. Croatia is due to join the EU from 1 July 2013.

72 Holidays in non EU destinations are not liable to TOMS. There are two ways to achieve this in the annual calculation. Under the worldwide method, holidays in 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. The margin 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.

73 Example: EU only or worldwide

In this example the worldwide calculation gives a lower liability. This is normal.

74 Operators can change from one method to the other if they notify HMRC a year in advance. HMRC 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.

75 If you change from one method to the other, you need to consider the effect on the provisional percentage. If you use the EU only method you have a higher percentage but you apply it to less turnover. When you first change to the EU only method, 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.

Current rules

76 TOMS is intended primarily to apply to holidays. Holidays are sold to consumers not to businesses. TOMS does not apply to wholesale supplies ie to any transaction whereby a business sells transport, accommodation etc to another business who then sell on. The test case was Norman Allen Group Travel Ltd. It bought in accommodation in France and sold it to a tour operator based in Japan who added flights and sold a package to Japanese holidaymakers. In 1996 the VAT Tribunal decided that TOMS did not apply to Norman Allen’s wholesale sales. There were different approaches in other member states but in principle following the changes in the UK in January 2010 and similar changes in other member states, all member states should be following the same approach as the UK. In practice this remains to be seen, especially in relation to conferences. See HMRC Brief 27/09.

77 Instead normal VAT rules apply to wholesale supplies. The place of supply of accommodation is where the property is located. So if the wholesaler sells UK accommodation it accounts for output VAT and claims input VAT in the normal way. If it sells non UK accommodation it has no UK liability and wholesalers obtained TOMS repayments following the Norman Allen decision in 1996.

78 TOMS applies to sales to other businesses for their consumption eg for their staff or provided to their customers without charge.  So business travel, incentive travel and conferences are often caught by TOMS.  This is a serious problem: the operator cannot reclaim input tax and cannot give the customer a VAT invoice so the customer cannot reclaim VAT. This was covered by a concession until 2010: para 3.3 709/5/2004. HMRC have agreed the bill back scheme, based on agency, for the hotel booking agent sector, but there are significant problems in this area. See HMRC Brief 21/10.

79 Organisers of UK conferences etc may therefore wish to fall outside TOMS and continue to use normal VAT rules after 2009. Ideally organisers would charge their customer a fee for their time and effort and treat payments to hotels etc as a disbursement. Hitherto the customer will have contracted with the organiser but in future the customer would enter into a separate contract direct with the hotel etc. The customer would need a VAT invoice from the hotel satisfying the usual requirements eg showing the customer’s name and address. There is no objection in principle to an organiser paying such bills on behalf of the customer, batching them up and passing them onto the customer together with a summary of the deductible VAT but the organiser must not reclaim the hotel VAT nor issue a VAT invoice for the hotel to the customer.

80 Organiser should beware of attempting to act as the agent of the hotel etc without considering the wider implications. Changing from principal to agent is a fundamental change in the business and not to be undertaken lightly. The terms & conditions and contractual arrangements need to be consistent. If the organiser is acting as the agent of the hotel, the organiser is working for the hotel, not for the customer, and may not be able to truly serve the best interests of the traveller. Think about what happens when you go to an estate agent looking for a house: the agent is working for the vendor, not for you. You may prefer to act as the agent of the buyer and treat the payment to the hotel as a disbursement.

81 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, HMRC may report this to the authorities in the other country.

82 The VAT treatment outside the UK is not covered in this note. Following the changes in the UK on 31 December 2009 and similar changes in other member states, wholesalers may be liable to register for VAT in other countries where the property is located, transport takes place etc. Operators making wholesale supplies outside the UK should take advice country by country.  Remember that the whole point of TOMS was to protect tour operators from having to make multiple VAT registrations. This seems to have been forgotten in 2010, which is a pity.

Previous rules

83 The treatment of supplies to other businesses was different until 31 December 2009. See HMRC Brief 27/09. Three special situations benefitted from special rules which have been withdrawn under pressure from the EU:

- Wholesalers who wanted to stay in TOMS: see para 84

- Supplies to other businesses for their consumption: see para 86

- Supplies of UK educational trips to Local Authority schools: see para 88.

There were also changes in 1996 and 1998 after the Norman Allen decision.

84 Some wholesalers wanted to stay in TOMS when HMRC changed the rules for wholesalers in 1996. This might have been 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 bought from unregistered suppliers, eg home stay accommodation, TOMS gave a lower liability. Accordingly, wholesalers were allowed to opt to remain in TOMS, subject to obtaining permission from HMRC. This was a rare scenario. 

85 This concession was withdrawn from 31 December 2009.

86 Supplies such as conferences and business travel, where travel or accommodation is supplied to another business and they do not resell it, fall into TOMS. But under TOMS the operator cannot issue a VAT invoice and the VAT is lost. So para 3.3 of 709/5/2004 allowed such operators by concession to use normal VAT rules instead of TOMS. In the case of UK supplies, HMRC permission was required to opt out so they should have a record.  In the case of supplies elsewhere in the EU, a condition was that the organiser was registered for VAT and accounted for output VAT on sales in the other member state which made it unattractive and the concession was very rarely used for supplies outside the UK. 

87 This concession was withdrawn from 31 December 2009.

88 Local authority schools can reclaim VAT. From January 2010 there are no special rules for supplies to local authority schools: 709/5/2009, para 3.4. Previously tour operators excluded educational UK trips for such schools from TOMS. This change increased the cost to local authorities of educational trips bought from tour operators. Operators need to understand that local authorities may be able to save VAT by going direct to hotels etc. However, some specialist school operators may not fall into TOMS eg if they run their own sites their supplies are equivalent to those of a hotel and they can continue to use normal VAT rules.

Place of supply rules

89 The place of supply determines in which country any particular transaction is liable to VAT. There were changes to the EU wide place of supply rules on 1 January 2010.  From 1 January 2010 the general rule for the place of supply of services distinguishes supplies to consumers from supplies to other businesses. For supplies to consumers, the place of supply remains where the supplier is established. For supplies to other businesses, the place of supply changed to where the customer is established (general rule) and if that is in another member state, the customer has to operate the reverse charge procedure and the supplier has to complete an EC Sales Listing (ESL).

90 The bulk of tour operators’ costs normally comprise transport, accommodation, car hire & restaurants all of which remain taxed in destination under their special place of supply rules. So most costs of most holidays were not affected by the 2010 change but the reverse charge is now the general rule and applies to all costs, except those with special place of supply rules.

91 The place of supply rules changed again on 1 January 2011. Until then EU law (Dir 2006/112, Art 53) said that the (business to business) services taxable in destination included “the supply of cultural, artistic, sporting, scientific, educational, entertainment and similar services” so pretty much anything else a tour operator did was taxed in resort and therefore outside the reverse charge. But from 1 January 2011 Art 53 only covers B2B “services in respect of admission to cultural .... events”. So theatre tickets or football tickets remain taxable in destination but purchasers of cultural etc services which are not admission to an event and are as a result no longer taxed in resort – possible examples are guide fees, ski lessons - have to reverse charge themselves UK VAT on the cost from then. They show output tax due to HMRC and equal and opposite input tax. Normally input tax is deductible so the reverse charge is a non event but under TOMS input tax on direct costs is not deductible. In theory if all the suppliers stopped charging VAT in resort and cut prices to the operators by about 20%, this would be VAT neutral. But what happens if the supplier continues to charge VAT but HMRC say they are taxable in the UK? Double taxation cannot be right. And what about non EU destinations - there has been no corresponding cut in local VAT? Considerable uncertainty remains and this is a major issue for many operators eg ski specialists.

VAT rate changes

92 TOMS uses the VAT fraction because sales and purchases are both VAT inclusive.  The rate of VAT was 17.5% (VAT fraction 7/47) from 1 April 1991 until 30 November 2008 when it was cut to 15% (VAT fraction 3/23) and then went back to 17.5% on 31 December 2009. It was increased to 20% from 3 January 2011 (VAT fraction 1/6). The examples in these notes assume the VAT fraction 1/6 throughout as does the standard spreadsheet. When the rate changes you need to consider the effect on the annual calculation and on your provisional payments (see in turn below).

93 If your accounting period straddles a rate change, you should do one annual calculation for the whole year but use an average VAT fraction. The VAT fraction should normally be a weighted average of the VAT fractions based on the sales in the two periods (on a departures basis). This gives the same answer as doing separate annual calculations for the two periods, analysing sales between the periods and apportioning the year’s costs pro rata sales for the two periods, as suggested by HMRC, but is much easier. However if your sales mix between EU and non EU destinations varies significantly between the two periods or you make significantly different margins at different times of the year, the averaging method may not give a fair and reasonable answer. You may want to do two separate calculations using actual sales, actual costs of sales and the different VAT fractions although this is not what HMRC suggest.

94 If you make standard-rated inhouse supplies eg your own UK hotel (D(4)), you will have reclaimed any VAT on the inhouse costs so the costs in the accounts are net of VAT and you have to add VAT to bring them into line with the rest of the annual calculation as required by step 4 of section 9, 709/5/2009. There is no HMRC guidance on the rate change and step 4: it is suggested that you gross up at step 4 by using a weighted average VAT rate, again based on the sales in the two periods. However if your business is seasonal you may want to do two separate calculations.

95 The provisional payments are easy: use the VAT fraction applicable on the date of departure and the provisional % from last year’s annual calculation. You may have to split a quarter’s sales into months if the quarter straddles a rate change but the main point is that the provisional % from the previous year’s annual calculation does not depend on the rate of VAT in the following year (and nor does the optimum transport mark up).

Credit card surcharges

96 There is a lot of misunderstanding about credit card surcharges. If a tour operator surcharges for payment by credit card, there is only one supply, to the traveller, and the full amount goes into sales for TOMS. The payment to the credit card company is an overhead and is not deductible in TOMS.  Instead you can reclaim any VAT on the cost, except that the charge is exempt so there is none. This has always been the correct treatment for tour operators. The position of travel agents is different. The travel agent has two separate clients, the tour operator who pays them a commission and the traveller who pays them a surcharge for being allowed to pay by credit card, and these two supplies are considered separately. Until 2007 HMRC used to accept that the surcharge was exempt but now they say that the surcharge is standard-rated.

97 In the traditional model, a holiday was sold by a travel agent on behalf of a tour operator. The agent earned a commission from the tour operator. The commission was liable to VAT which was paid over to HMRC by the agent and reclaimed by the tour operator. The traveller knew that their contract was with the tour operator not with the travel agent. The travel agent did not use TOMS. The tour operator paid TOMS based on the selling price paid by the traveller, before deducting the agent’s commission. Few companies acted as both agent and principal so the two different roles were clear.

98 This model is still valid but the demarcation lines between agents and principals have broken down. Some operators are selling direct to consumers without using travel agents. Some are acting as agents rather than as principals to save VAT and bonding. Some travel agents are offering dynamic packaging and falling into TOMS. So it is now necessary to be clear about the precise contractual relationships and what they mean for TOMS, and for bonding, insurance and other purposes.

99 If a tour operator also makes supplies as a disclosed agent, the agency commission should be excluded from TOMS and charged to VAT under general principles. The commission may be exempt (eg arranging insurance), zero-rated (eg arranging zero-rated passenger transport), outside the scope of UK VAT (eg arranging non UK accommodation) or standard-rated (the default position eg arranging UK car hire). This assumes that the commission is readily identifiable so that the cost and selling price of the agency transactions can both be excluded from the calculation.

100 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 of the agency supply 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 709/5/2009.

101 Some travel companies structured their business as the agents of suppliers, eg overseas hotels, instead of as principals.  This was appropriate for businesses specialising in accommodation only and in just one or two countries.  It reduced the TOMS liability because the commission received from the hotels was outside the scope of UK VAT and in practice there was no corresponding overseas liability. This practice grew with the bedbanks to the point at which HMRC could no longer ignore it and they stated that they saw it as tax avoidance.  Accordingly, HMRC took a test case, International Life Leisure Ltd. The VAT Tribunal ruled in 2006 that ILL were liable for TOMS.

102 Similarly in the Med Hotels saga. The Lower Tax Tribunal decision went in favour of HMRC.  The Tribunal had little sympathy with Med Hotels, probably because it was clear that the overseas hotels were only paying VAT on the net price so the margin was not being taxed anywhere. Med Hotels won their appeal to the Upper Tax Tribunal but HMRC won in the Court of Appeal in July 2012 and Med Hotels are appealing to the Supreme Court.  Meanwhile HMRC can be expected to follow through and to ask bedbanks and other UK based agents to pay TOMS in future unless they can show that the principal is accounting for tax on the full selling price. However, it remains possible to be an agent and to avoid TOMS, eg if you sell car hire or accommodation as the agent of an overseas supplier and they take the money from the traveller and then pay you your commission.

103 In 2009 the Magistrates Court decision cleared Travel Republic Ltd of breaching ATOL regulations. It was not a tax case but it is fair to assume that the main reason the company adopted the structure it did was TOMS not bonding and had it lost the bonding case it would have made it more difficult to save TOMS.  The burden of proof is of course higher in a criminal case than in a tax case and the CAA have appealed so this may be overturned but meanwhile it is one decision in favour of the taxpayer.

104 Insurance income and costs are excluded from TOMS but there may be important IPT and partial exemption implications, beyond the scope of these notes. However, most operators will not have a problem as their exempt input tax will be below the de minimis limit. Specialist advice may be necessary.

105 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. There is an option in TOMS to recognise income earlier: paras 4.14/4.15 of 709/5/2009. The law is in SI 1997/1806 and the interpretation of the law set out in 709/5/2009 is debatable. However it will hardly ever be beneficial to use the earlier tax point rules so these earlier tax point rules should be avoided. If your accounts recognise income before departure date, your accounting may be the problem, not TOMS.

VAT invoices

106 Under TOMS the liability is calculated at the year end and the amount of VAT in each sale is not known at the time of supply. HMRC say that this means that VAT invoices cannot be issued for supplies in TOMS (para 4.20 of 709/5/2009). This prevents business customers reclaiming VAT and conflicts with fundamental principles of VAT. This can be a big problem eg on conferences. Nonetheless, if a tour operator sells to another business, HMRC expect them to issue an invoice which otherwise conforms to the usual requirements for VAT invoices and is, for example, pre-numbered. HMRC also wish to see a statement on the invoice that the supply falls under TOMS.

Simplified annual calculations

107 Para 5.5 of 709/5/2009 introduces and section 11 details a simplified annual calculation. If the supplies are all standard-rated (whether bought in or inhouse), the liability is the VAT fraction x the difference between the sales and purchases. The simplified calculation gives the same answer as the full annual calculation, if all supplies are standard-rated. This is helpful where all the supplies are to EU destinations (including the UK) and there are standard-rated inhouse supplies eg they run their own UK hotel. It avoids the need to value the inhouse supplies (whether at cost plus or at market value). This is possible because a little algebra or a numerical example will show that the liability is the same irrespective of the value adopted for inhouse supplies.

108 However it is not simple to decide when the simplified calculation applies and it is safer not to use it unless you know what you are doing. The full calculation will always give the right answer but the simplified calculation will give too great a liability if it is used when it does not apply. Where “all such supplies are liable to VAT at the same rate”, Para 1, TL4, section 13, 709/5/2009 requires operators to use the simplified annual calculation. This is incorrect (even if it is UK law, it is contrary to EU law) and the simplified annual calculation should not be used if all the supplies are zero-rated eg the tour operator only sells holidays in non EU destinations. In this case the correct liability is zero, not 1/6 x the non EU margin as suggested by the simplified calculation. Para 5.5 of 709/5/2009 confirms this point but does not have the force of law.

109 Other points on the simplified calculation:

• Any operator using a transport company to mitigate the 1996 extension of TOMS to EU transport needs to do the full calculation to calculate the Newco mark up.
• If the simplified calculation is used and an operator reverts to making supplies with different liabilities, it will be important to remember to change back or the operator will overpay.

110 Travel agents may discount holidays and take less commission. If they do so without telling the tour operator, the tour operator may assume the usual commission applies and show too much commission in their accounts. The selling price of the holiday, 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 if the amount of the discount is known but this may be difficult. The agents may not have the information. In addition, there are implications for self billing: the input tax claimed may be wrong. Following the confused ECJ decision in First Choice Holidays, HMRC say a tour operator cannot adjust for discounts funded by the agent without the knowledge of the operator: 709/5/2009, para 6.1.

Reps and guides

111 The treatment of reps, guides, couriers or tour managers is often muddled. HMRC may seek to disallow the cost of reps on the basis that they only meet & greet at the airport and or in resort. The principle is that purchase costs are allowed in TOMS if they are for the direct benefit of the traveller (Art 308). Purchases exclude salaries, as they do not attract VAT, so it is clear that the salaries of reps etc should be disallowed (do not confuse this with the cost of inhouse supplies eg the coach driver’s salary – this is an attempt to value the selling price of the inhouse supply as cost plus margin). But the services of reps may be bought in from other businesses or self employed individuals with VAT added or not as the case may be and should in this case be allowable even if they “only meet & greet”. HMRC say the cost of more specialist guides “is often a supply in its own right” (para 6.10) ie presumably a direct cost and therefore allowable.

112 Whether a particular supply eg guide is bought in or inhouse is a separate question but it is difficult to see how guides in isolation can create an inhouse supply. Accordingly it is rare to see inhouse guide costs in a TOMS calculation. The position is different if for example you run a ski chalet in France, employ guides, provide equipment, are registered for TVA and include the guiding supply in your TVA returns.

Purchases in foreign currencies

113 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 HMRC rules. TL2 in section 13 of 709/5/2009 says operators must use one of 5 methods summarised as:

(a) the Federation of Tour Operators’ rate at the time of costing,

(b) the commercial rate of exchange at the time of costing,

In the case of the first two options you must publish the rate in your brochure.

(c) the rate published in the Financial Times on the date you make payment,

(d) the rate applicable to the purchase of the foreign currency used to pay for the supplies and

(e) the rate of exchange published by HMRC for the period when you paid for the supplies.

Each of these methods has its problems.

114 As there is a choice of methods but (unlike non EU destinations above) no default method, where does a tour operator who has hitherto complied with none of HMRC’s methods stand? If you want to use a different method from the previous year, HMRC say you must notify them 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.”

115 A fundamental criticism of these 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 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 HMRC. TOMS was designed as an accounts based calculation and, provided the operator is consistent in using the accounts figures, HMRC may not challenge this approach. This is the practical solution to the problem.

Self billing and travel agents’ liability on commissions

116 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 nothing to do with TOMS.

117 HMRC’s 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.

118 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 January 1996 seat only sales are seen as holidays and the commission is standard-rated. See Business Brief 2/96 and Information Sheet 6/96.

119 Read Notice 709/5/2009 (first issued in 1988 and last reissued in 2009) which is available here or direct from HMRC’s web site (www.hmrc.gov.uk). It is a useful summary of TOMS, although it would be improved if it contained numerical examples and there several errors in the text.

120 The tertiary law set out in section 13 of 709/5/2009 is summarised as follows:

TL1 Non EU destinations – see para 72 above

• A tour operator may be allowed to do an EU only calculation if HMRC are notified before the due date for the first return in the year in question.
• A tour operator may be allowed to revert to doing a worldwide annual calculation if HMRC are notified before the due date for the first return in the year.

TL2 Purchases in foreign currencies – see para 113 above

• Costs in foreign currencies must be translated into sterling using 1 of 5 methods.
• A tour operator may be allowed to change method if HMRC are notified before the due date for the first return in the year in question.

TL3 Market value see para 67 above.

TL4 Calculations:

• Tour operators shall use the annual calculation in sections 9 or 11 (simplified).
• Tour operators shall use the provisional calculations in sections 10 or 12.
• Tour operators shall pay the provisional amounts of tax for the period concerned.
• Tour operators shall make the annual adjustment in the first return in next year.

TL5 Definitions

This contains definitions of various terms. The definition of inhouse supply is particularly uninformative: “a supply by a tour operator which is neither a designated travel service nor an agency supply.” 

121 Further reading

• My spreadsheet http://www.pooley.co.uk/toms_notes_excel.pdf
• Does TOMS apply to this transaction? See my flowchart
• The VAT (Tour Operators) Order (SI 1987/1806)
• Arts 306 - 310 of the Principal VAT Directive. See para 122 below
• HMRC Information Sheet 03/96 on TOMS and the airline charter option (no longer on HMRC website but a copy is available from me on request).
• HMRC Information Sheet 04/96 on TOMS and the agency option (no longer on HMRC website but a copy is available from me on request).
• HMRC Information Sheet 01/97 on TOMS and the transport company scheme (no longer on HMRC website but a copy is available from me on request).
• International Life Leisure Ltd VAT Tribunal decision in 2006
• HMRC notes on 2010 changes to TOMS: Brief 27/09
• HMRC notes on transitional provisions on 2010 TOMS changes: Brief 74/09
• HMRC Notice 700/62/2003 on Self-billing
• HMRC notes on ESLs in general from 2009
• HMRC Brief 21/10 on hotel bill back procedure

122 The last word must go to EU law. Arts 306 to 310 of the Principal VAT Directive are the basis of TOMS so it helps to understand them. See below. There are some subtle differences from the previous wording of Art 26 of the Sixth VAT Directive but it is much the same. There are also subtle differences between the text in different languages. Note that it refers to travel agents rather than tour operators and the UK distinction between the two does not translate well into other member states.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:347:0001:0118:EN:PDF

Special scheme for travel agents

Article 306

1. Member States shall apply a special VAT scheme, in accordance with this Chapter, to transactions carried out by travel agents who deal with customers in their own name and use supplies of goods or services provided by other taxable persons, in the provision of travel facilities.

This special scheme shall not apply to travel agents where they act solely as intermediaries and to whom point (c) of the first paragraph of Article 79 applies for the purposes of calculating the taxable amount.

2. For the purposes of this Chapter, tour operators shall be regarded as travel agents.

Article 307

Transactions made, in accordance with the conditions laid down in Article 306, by the travel agent in respect of a journey shall be regarded as a single service supplied by the travel agent to the traveller.

The single service shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has carried out the supply of services.

Article 308

The taxable amount and the price exclusive of VAT, within the meaning of point (8) of Article 226, in respect of the single service provided by the travel agent shall be the travel agent's margin, that is to say, the difference between the total amount, exclusive of VAT, to be paid by the traveller and the actual cost to the travel agent of supplies of goods or services provided by other taxable persons, where those transactions are for the direct benefit of the traveller.

Article 309

If transactions entrusted by the travel agent to other taxable persons are performed by such persons outside the Community, the supply of services carried out by the travel agent shall be treated as an intermediary activity exempted pursuant to Article 153.

If the transactions are performed both inside and outside the Community, only that part of the travel agent's service relating to transactions outside the Community may be exempted.

Article 310

VAT charged to the travel agent by other taxable persons in respect of transactions which are referred to in Article 307 and which are for the direct benefit of the traveller shall not be deductible or refundable in any Member State.

Further Information

• Download my Tour Operators' Margin Schemes (TOMS VAT) booklet (MS Word)

TOMS VAT: Navigating the Tour Operators Margin Scheme in the UK

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Tour Operators’ Margin Scheme (TOMS) VAT

The Tour Operators' Margin Scheme (TOMS) is a vital aspect of the Value Added Tax (VAT) system for businesses in the travel industry. Since 1 January 2021, TOMS has undergone significant changes, including the temporary 5% reduced rate of VAT. Understanding these changes is crucial for compliance and financial planning. This page aims to guide tour operators in understanding and applying TOMS, ensuring compliance with all relevant laws and regulations, and offering a comprehensive service tailored to the unique needs of the travel industry.

Navigate the complexities of the Tour Operators' Margin Scheme with our specialised VAT services. Schedule a consultation with our experts today to ensure compliance, accuracy and efficiency in your VAT management. Call us at 0330 8284 282 or fill out our contact form .

Overview of TOMS

TOMS is a special VAT scheme designed to simplify the tax process for businesses that buy and sell travel, accommodation and certain other services. It applies to businesses that make supplies where the customer receives a benefit from travel services. The legal framework governing TOMS is outlined in the VAT Act 1994 and the VAT Regulations 1995. This scheme is essential for tour operators, travel agents and other businesses in the travel sector, as it affects how VAT is calculated and reported.

Does TOMS apply to this transaction?

Take a look at our handy flowchart to see if TOMS should be used for a transaction.

Understanding TOMS

TOMS covers a wide range of supplies, including accommodation, passenger transport and tour guide services. It operates by calculating VAT on the margin made on the supply of travel services. Margin Scheme supplies are those where VAT is accounted for on the margin, including travel services both within and outside the UK. Understanding the nuances of what TOMS does and does not cover is essential for accurate VAT reporting. Our service provides detailed guidance on these aspects, ensuring that your business complies with all relevant regulations.

How The VAT People help with TOMS 

Our service begins with a comprehensive assessment and consultation to understand your specific needs. We provide tailored advice and guidance on implementing TOMS, including calculations and compliance with all legal requirements. Our ongoing support ensures you stay up to date with changes in VAT laws and regulations. Whether you are new to TOMS or need assistance with existing processes, our team of experts is here to assist you every step of the way.

Special rules and considerations

Determining taxable turnover for VAT registration or de-registration is crucial under TOMS. Our service guides you on what VAT can be reclaimed and what cannot. We also explain the place of supply for different travel services and help you determine the tax point for Margin Scheme supplies. Special considerations such as the impact of TOMS on in-house supplies and margins during the temporary reduced rate period are also covered. Our team ensures that you understand all the special rules and considerations that apply to your business, providing peace of mind and confidence in your VAT reporting.

Why choose us?

Our team of experts specialises in VAT laws and the travel industry. We offer customised solutions to each business, ensuring compliance with all legal requirements. Our clients' positive feedback is a testament to our commitment to excellence. With our service, you gain access to a wealth of knowledge and experience, tailored support and the assurance of compliance with all TOMS regulations. We are dedicated to your success and work closely with you to achieve your business goals.

Differentiating between supplies to business customers for resale and consumption is essential. Our service offers guidance on handling wholesale supplies outside TOMS. Whether you are dealing with business customers or wholesale supplies, our team provides the insights and support you need to manage these aspects of TOMS effectively.

Special rules apply to cruises and connected flights. We also provide information on compatibility with other VAT schemes like the Annual Accounting Scheme and explain VAT invoicing rules under TOMS. From cruises to invoicing requirements, our service covers all additional considerations that may apply to your business, providing comprehensive support and guidance.

Contact The VAT People for tailored TOMS consultancy

TOMS is a complex area that requires careful consideration and understanding. Our service is designed to provide comprehensive guidance to tour operators, ensuring compliance and efficiency. With our expert support, you can navigate the complexities of TOMS with confidence and ease.

For further inquiries, please contact us at 0330 8284 282 , or fill out our contact form .

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

TOMS is a special VAT scheme for businesses that buy and sell travel, accommodation, and certain other services. It simplifies the VAT process by calculating VAT on the margin made on the supply of travel services.

Who is eligible to use TOMS?

Businesses that make supplies where the customer receives a benefit from travel services are eligible to use TOMS. This includes tour operators, travel agents and other businesses in the travel sector.

Can I reclaim VAT under TOMS?

Certain VAT can be reclaimed under TOMS, while some cannot. Our service provides comprehensive guidance on what can and cannot be reclaimed, ensuring compliance with all relevant regulations.

How can your service assist me with TOMS?

Our service offers comprehensive support for all aspects of TOMS, including understanding the scheme, implementing it in your business and ensuring compliance with all legal requirements. We provide tailored advice, practical guidance and ongoing support.

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VAT Tertiary Legislation

Margin schemes.

Tertiary legislation about VAT margin schemes (including those for tour operators and second hand vehicles).

Notice made under The VAT (Special Provisions) Order 1995 and The VAT (Cars) Order 1992)

1. force of law.

In UK law, Section 50A of the VAT Act 1994 allows the Treasury to make Orders to introduce Margin Schemes. 

Article 8(1) of the VAT (Cars) Order 1992 (SI 1992/3122 (as amended) (“the 1992 Order”)):

Subject to complying with such conditions (including the keeping of such records and accounts) as the Commissioners may direct in a notice published by them for the purposes of this Order or may otherwise direct, and subject to paragraph (3) below, where a person supplies a used motor car which he took possession of in any of the circumstances set out in paragraph (2) below, he may opt to account for the VAT chargeable on the supply on the profit margin on the supply instead of by reference to its value.

Article 12(1) of The VAT (Special Provisions) Order 1995 (SI 1995/1268) (as amended) (the “1995 Order”):

Without prejudice to article 13 below and subject to complying with such conditions as the Commissioners may direct in a notice published by them for the purposes of this Order or may otherwise direct and subject to paragraph (4) below, where a person supplies goods of a description in paragraph (2) below, of which he took possession in any of the circumstances set out in paragraph (3) below, he may opt to account for the VAT chargeable on the supply on the profit margin on the supply instead of by reference to its value.

Article 13(1) of The VAT (Special Provisions) Order 1995 (SI 1995/1268) (as amended) (the “1995 Order”):

Subject to complying with such conditions as the Commissioners may direct in a notice published by them for the purposes of this Order or may otherwise direct, and subject to paragraph (2) below, a taxable person who has opted under article 12(1) above may account for VAT on the total profit margin on goods supplied by him during a prescribed accounting period, calculated in accordance with paragraph (3) below, instead of the profit margin on each supply.

Use of the schemes is subject to compliance with those conditions or directions.

This notice sets out the conditions and directions having force of law under these articles.

2. Stock book

 2.1 general requirements.

The following has force of law under Article 8(1) of the 1992 Order and Article 12(1) of the 1995 Order

You must maintain a stock book in written or electronic form.

There is an exception to this requirement when using the Auctioneers scheme (see 2.6 below) and for occasional sales (see 8 below).

2.2 Detailed records

Your stock book must contain the following information for items bought and sold under a Margin Scheme.

Purchases:                                                          

• Unique stock number (in numerical sequence)
• Date of purchase                                          
• Purchase invoice number                             
• Name of seller                                              
• Description of the item                                 
• Purchase price                                             
• Date of sale
• Sales invoice number
• Name of buyer
• Description of the item
• Sales price, or method of disposal
• Margin achieved on sale
• VAT due on margin

There is an exception to this requirement when using the Auctioneers scheme (see 2.6 below).

2.3 Additional requirements for vehicles

The stock book must also record the:

• the vehicle registration number (VRN) or if none, the Vehicle Identification Number (VIN).
• a description consisting of the make, model and colour)

2.4 Additional requirements for horses and ponies

The following has force of law under Article 12(1) of the 1995 Order

In addition to the general stock book requirements (see para 2.2 above), you must also include enough information in your stock book to identify the horse or pony, including: 

• unique identifying passport number or
• a vet must certify that the horse or pony is the one described on the invoice.
• type or breed, for example, cob or thoroughbred
• distinctive markings

And where known:

• stable name

2.5 BETA scheme for horses and ponies

As an alternative to the margin scheme invoice requirements, you may use the British Equestrian Trade Association (BETA) form provided you complete it in full.  You should use one form for each horse or pony you buy or sell.

 2.6 Auctioneers scheme

You must retain a stock book in keeping with para 2.1 and 2.2 above or retain sufficient alternative records which provides the information in para 2.2. 

Examples of alternative records may include:

• entry forms
• sales catalogues
• copies of lots and sales of the day
• copies of sales and purchase invoices

 3. Stock number

Each purchase must be allocated a unique, sequential number: the stock number.

To ensure an audit trail is maintained, the stock number must be noted on the purchase and sales invoices.

4. Issue sales invoices containing specific information

You must include the following information on sales invoices for all Margin Scheme sales.

• Your name, address and VAT registration number
• The buyer’s name and address
• Invoice number
• Stock book number (see paragraph 3)
• Total price – you must not show VAT separately

4.1 Special rules for the Auctioneers Scheme

When you sell an item under the scheme, you must issue an invoice to both the buyer and the seller.

You must issue the:

• seller with an invoice or statement which includes all the details listed below
• buyer with an invoice or other document which includes all the details listed below

Purchase invoice or statement

You must issue the seller with an invoice or statement which includes  the following details:

• seller’s name and address
• your name and address
• a means of cross-referencing between the sales system and the stock book, for example, the stock book number
• invoice number
• date of transaction
• a description of the item
• the price of the goods sold at auction
• any commission charges you made to the seller (you must not show a separate amount of VAT on these charges)
• your purchase price
• the selling price for a seller who is VAT-registered and is using the Margin Scheme.

5. Issue self-billed invoices to suppliers, containing specific information

If you’re buying from a private individual or an unregistered business, you must make out the purchase invoice yourself (a self-billed invoice ).

When completing a self-billed invoice, you must include the following specific information.

• Seller’s name and address
• Date of transaction
• Stock book number
• Description of the item(s)
• Total price paid – you must not add any other costs to this price

6. Global Accounting Scheme

The following has force of law under Article 13(1) of the 1995 Order

6.1 Sales invoice

You must include the following information on sales invoices for Global Accounting sales: 

• Your name, address and VAT registration number
• Description of goods (this must be sufficient to enable us to verify that the goods are eligible for global accounting, for example 4 tables, 10 chairs – ’assorted goods’ is not acceptable)
• Total price - you must not show VAT separately

 6.2 Purchase invoice

• Total price paid

6.3 Records

You must keep a record of all purchases and sales and calculations of how the global margin was calculated.

Global accounting records should be separate from any margin scheme records.

6.4 Goods lost through breakage, theft or destruction

If you lose any goods through breakage, theft or destruction, you must subtract their purchase price from your global accounting purchase record. 

6.5 Use of global scheme for scrap vehicles.

You can include second-hand motor vehicles in the global margin scheme if you break them up and sell the parts on as scrap. However, the margin schemes can’t be used for the sale of parts valued at over £500.

6.6 Commencement of use of global scheme.

When you start using the global accounting scheme, you may include any eligible stock on hand.

You must be able to identify the:

• eligible stock
• purchase value

6.7 Cessation of use of global scheme.

In the final period you use the scheme, you must make a closing adjustment to take account of purchases for which you have taken credit, but which have not been sold.

7  Pawned Goods

7.1 additional conditions for pawned goods.

In addition to the general conditions, you can only use a margin scheme if all of the following apply:

loan is for £75 or less

the loan period was for at least 6 months

7.2 Restoration of pledge

If the pledge is restored during the period of grace, then there will be no VAT due on the supply provided you:

• record the redemption in your pledge stock records
• stamp the ‘Credit Agreement and Pawn Receipt’ with the date of redemption and keep it for inspection

7.3 Purchase invoice for pawned goods

You can keep the credit agreement or pawn receipt as your purchase invoice, as long as:

• the contract number is entered in your pledge stock record and cross refers to the credit agreement
• a copy of the interest calculations and total purchase value for margin scheme purposes is attached, if it differs from the amount shown on the receipt.

8. Occasional Sales

Businesses that make an occasional sale of eligible goods do not need to comply with the full record-keeping requirements .

You do not have to maintain a stock book for occasional sales, but you must retain the purchase and sales invoice with evidence of how the margin is calculated.

9. Sale or Return

The following has force of law under Article 8(1) of the 1992 Order and Article 12(1) and 13(1) of the 1995 Order

9.1 Goods transferred to you

For eligible goods transferred to you on a sale or return basis the following should be recorded in your records

• the date of transfer of the item
• description of the item
• the name and address of the dealer or person transferring the item to you
• the date of sale or return or date of adoption

9.2 Goods transferred from you

For eligible goods you transfer to another business on a sale or return basis you should keep a record of:

• the date of transfer from you on a sale or return basis of the item
• the name and address of the dealer or person you transferred the goods to
• the date of subsequent adoption by that person

Tour operators margin schemes

The following content has force of law under S53(1) of VATA Arts 3 & 7 of The VAT (Tour Operators) Order 1987 (1987/1806) and was originally published in VAT Notice 709/5 .

1. Market Value calculation (annual adjustment)

Only use this section if you have packages or parts of packages being apportioned by the market value of the in-house element of the package. On completion of all the steps M1-M5 you must then follow the steps in the cost-based calculation in  section 2 , taking forward the figures from this section as instructed.

1.1 Calculate the value of sales of Margin Scheme packages

1.2 working out the market value, 1.3 working out selling value of margin scheme supplies and non-market value in-house supplies, 2. cost-based calculation (annual adjustment).

This section applies to packages being apportioned by reference to the costs of the in-house element of the package, and imports the figures calculated by the market value method in section 1, where that method is used for all or some of the travel packages. Do not include values already entered in section 1 unless explicitly instructed.

2.1 Working out the total sales of Margin Scheme packages

2.2 working out the purchase prices of margin scheme supplies, 2.3 working out the direct costs of in-house supplies..

Steps 4 to 7 should not include costs relating to an in-house supply accounted for under section 1 (market value)

2.4 Working out the ‘costs’ of agency supplies

2.5 working out the total margin, 2.6 apportioning the margin.

Steps 14 to 17 can be ignored where a market value is applied to all in-house supplies under section 1

2.7 Working out your output tax

2.8 working out sales values, 2.9 working out the annual adjustment, 3. accounting for vat on the provisional value of margin scheme supplies, 3.1 working out the provisional percentage, 3.2 working out the vat return figures, 4. simplified end-of-year calculation (annual adjustment), 5. accounting for vat on the provisional value of margin scheme supplies when the simplified calculation applies (all supplies standard-rated), 6. tertiary law, second-hand motor vehicle payment scheme.

(First published 28 April 2023)

Notice made under the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023

Where terms are used in this notice which are defined in the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023, they have the same meaning.

A.  Claims made under article 8 of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023

Payment representative.

The following text has the force of law under article 6(6) of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023.

An application to appoint a person as a payment representative must be made on the HMRC form entitled ‘Second-hand Motor Vehicle Payment Scheme — Appoint a payment representative ’ and the declaration on that form must be signed by both the claimant and the payment representative.

The form can be sent to HMRC by email to [email protected] or by post to:

HM Revenue and Customs — Campaigns & Projects VAT Overseas Repayment Unit S1250 Benton Park View NEWCASTLE UPON TYNE NE98 1ZZ United Kingdom

Where HMRC agrees to the appointment, it will notify both the claimant and the payment representative in writing (including in electronic form) and the appointment will take effect from the date shown on that notification.

HMRC may refuse to agree to the appointment of a person as a payment representative if it is satisfied that the person is not a fit and proper person to act in that capacity.

Where a person is appointed as a payment representative in accordance with this notice HMRC may terminate that person’s appointment if it is satisfied that the person is not, or is no longer, a fit and proper person to act in that capacity.

Where HMRC terminates an appointment, it will notify both the claimant and the payment representative in writing (including in electronic form), and the appointment will be terminated from the date shown on that notification.

Where a person is appointed as a payment representative in accordance with this notice, either the claimant or payment representative may terminate the appointment by notifying HMRC and the other party in writing (including in electronic form), and the termination will take effect from the date shown on that notification.  

Method of claiming

The following text has the force of law under article 8(1) of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023.

A claim under article 8 must be made on HMRC form VAT67 including the continuation sheet VAT67(CS) , unless otherwise agreed by HMRC.

HMRC may agree, where requested by a claimant, that a claim can be made other than on form VAT67 . However, the claim must contain the same information as is on form VAT67 . 

A claim can be sent to HMRC either electronically or by post.

A claim can be sent to HMRC electronically using HMRC’s Secure Data Exchange Service (SDES) system.

A claim can be sent to HMRC by post to: 

A claim must be accompanied by:

• a purchase invoice as specified in the direction made under article 11 in this notice for each motor vehicle in respect of which a claim is made, and where the purchase invoice has been made out by the claimant, proof of payment such as an entry on a bank statement
• documents as specified in the direction made under article 11 in this notice that show that each motor vehicle has been exported to the EU Member State in which the claim is made and
• proof that the claimant was registered for VAT in the Member State that the motor vehicle has been exported to, during the period in relation to which a claim is made — this may include a certificate from the official authority of the EU member state that the claimant has exported vehicles to, showing that the claimant’s status as VAT registered in that member state during that period, called a ‘certificate of status’.

A certificate of status must contain:

• the name, the address and official stamp of the authorising body (or other recognised identification mark)
• claimant’s name and address
• the nature of claimant’s business and
• claimant’s VAT registration number

The following text has the force of law under articles 8(3), 8(5) and 8(6) of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023.

The first prescribed period will be for the period of 14 months from 1 May 2023 to 30 June 2024 inclusive. A maximum of 5 claims may be made in respect of this prescribed period.

After 30 June 2024 prescribed periods will be periods of 12 months beginning on 1 July of each calendar year.

Error correction

The following text has the force of law by virtue of article 9(2) of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023.

An overstated entitlement on a claim must be notified to HMRC by email to: [email protected] or by post to:

HM Revenue and Customs — Campaigns & Projects

VAT Overseas Repayment Unit S1250 Benton Park View NEWCASTLE UPON TYNE NE98 1ZZ United Kingdom

A notification should include:

• the claim period that the errors occurred in
• the vehicle or vehicles the errors relate to
• the amounts of VAT-related payment wrongly claimed and
• what the correct amounts should have been

Where there are overstated entitlements on more than one claim, they can be included on a single notification providing that they are separately identified.

B Claims made under article 7 and article 8 of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023 

Records which must be kept.

The following text has the force of law under article 11 of the Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT-related Payments) Order 2023.

A stock book must be kept which records the following details for each motor vehicle on which a claim is made:

• stock book reference number for each vehicle in numerical sequence
• date of purchase
• purchase invoice number
• purchase price
• name of seller
• description of the vehicle (including make and model, engine size and colour)
• DVLA / Isle of Man Vehicle Licensing logbook reference number
• vehicle identification number or chassis number
• vehicle registration number
• date of first registration
• date the vehicle is removed from Great Britain to Northern Ireland or exported from Great Britain to an EU Member State
• country that the vehicle is exported to
• value on which claim is based (if different from the purchase price)
• date that the vehicle is sold
• sales invoice number
• name and address of buyer
• selling price and
• details of how the vehicle was disposed of (if not sold)

The stock book must be kept in writing (and may be kept in electronic form) and must be maintained separately from any records being maintained for the purposes of a second-hand margin scheme.

An invoice from the seller, or a self-billing invoice, must be held for each vehicle on which a claim is made. That invoice must include the following information:

• the date of purchase
• the seller’s name and address
• the claimant’s name and address, or that of the claimant’s business
• the vehicle’s unique stock book number (unless the vehicle was bought from another VAT-registered business)
• the invoice number (unless the invoice is made out by the claimant)
• the vehicle description
• the total price — the claimant must not add any other costs to this price and
• if the vehicle was bought from another VAT-registered business under the margin scheme for second-hand goods

Documents that evidence removal or export

You must keep documents which relate to the removal or export of each vehicle on which a claim is made which show the:

• mode of transport involved
• route of the movement (for example, the port of exit)
• date of departure of the vehicle and
• delivery address for the vehicle

Examples of such documents include, but are not limited to:

• any customs declaration or other documentation that shows a vehicle has been exported from Great Britain or imported into the EU
• travel tickets
• name of ferry or shipping company and date of sailing or airway number and airport, road consignment (CMR) note, courier dispatch paperwork, bill of lading or airwaybill and
• details of any haulier or other courier who makes the movement on behalf of the claimant, including any invoices they have issued or information they have provided to the claimant

Period of retention of records

The stock book and other documents that are required to be retained in relation to a claim must be kept for 6 years beginning with the date of the claim to which they relate.

If this period of retention causes serious storage problems or undue expense, then the claimant should contact VAT general enquiries .

HMRC may allow some records to be kept for a shorter period.

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