Tour Operators Margin Scheme (TOMS) is a special scheme for businesses that buy in and resell travel, accommodation, and certain other services as a principal or undisclosed agent (acting in your own name). It is not applicable to the agent acting on behalf of others.
This scheme is designed specifically for companies engaged in purchasing and reselling travel, accommodation, and select related services either as the primary provider or as an undisclosed agent, meaning they operate under their own business identity.
TOMS represents a simplification initiative by consolidating multiple transactions directed towards the same entity into a single supply.
Calculation of VAT under Tour Operators Margin Scheme
Under normal VAT scheme, VAT liability is calculated as a difference between the output VAT and Input VAT. Output VAT is calculated on Sales or revenue whereas the Input VAT is calculated from the Rent, other direct cost & Overheads.
VAT under TOMS is calculated on the Margin earned by the Tour Operator.
The margin is calculated as the difference between the revenue & direct costs including rent. However, Input tax on overheads is deducted to calculate the final VAT liability.
Let take an example to understand VAT calculation under Normal VAT scheme and TOMS.
UNDER Normal VAT Scheme
|
S.N |
Particulars |
Amount Excluding VAT |
VAT |
Remarks |
|---|---|---|---|---|
|
1 |
Revenue |
1,500,000.00 |
300,000.00 |
Output VAT |
|
2 |
Rent |
800,000.00 |
—– |
No Input VAT |
|
3 |
Other Direct Cost |
300,000.00 |
60,000.00 |
Input VAT |
|
4 |
Gross Overhead |
200,000.00 |
40,000.00 |
Input VAT |
VAT Liability [Output VAT-Input VAT] 200,000.00
UNDER TOMS VAT Scheme
|
S.N |
Particulars |
Amount Excluding VAT |
VAT |
Remarks |
|---|---|---|---|---|
|
1 |
Revenue |
1,500,000.00 |
300,000.00 |
VAT On Margin |
|
2 |
Rent |
800,000.00 |
—– |
VAT On Margin |
|
3 |
Other Direct Cost |
300,000.00 |
60,000.00 |
VAT On Margin |
|
– |
Margin |
400,000.00 |
80,000.00 |
VAT on Margin |
|
4 |
Gross Overhead |
200,000.00 |
40,000.00 |
Input VAT |
VAT Liability 40,000.00
In the above example, VAT liability under the normal VAT scheme is £200,000 whereas under the TOMS scheme, VAT liability amounts to £40,000 thereby resulting in substantial VAT saving of £160,000.
TOMS calculation is carried out once a year following the financial year end. VAT is still paid throughout the year, but on “Provisional basis”. This is based on the last year’s margin and VAT payment. TOMS thus helps to reduce complexity for service operators by paying VAT only on the margin on your service.
The service accommodation operator cannot recover any input VAT on direct cost, but VAT can still be recovered on overheads. The direct cost for a service accommodation under TOMS is not properly explained in the guidance, but direct cost generally includes rent paid to the landlord, insurance costs. utility bills, etc.
Conditions for Applying Tour Operators’ Margin Scheme
TOMS Applies where:
- There is a supply of “Travel services”
- The supplier is acting in his OWN NAME.
- The service is acquired from a third party and are supplies without “material alteration” or “further processing”
- The service are supplies “for the benefit of the traveller”
1. Travel Service
Accommodation is a travel service if it is held out for use by tourists, travellers or visitors. These are in direct competition with hotels.
Some of these services are:
- Accommodation
- Passenger transport
- Hire or means of transport.
- Trips or excursions
- Services of tour guides
- Use of special lounges at airports, etc
2. Acting in own name
Acting in own name under TOMS means that the supplier must have contract for the lease with the landlord with contract allowing subletting or if person owns the property, then carry out the service accommodation business in his own name.
Please note that the supplier must not act as an agent of the landlord. The service provider must act independently.
3. Further Processing and Material Alteration
To be eligible for TOMS the state of the property should be same when it was initially leased to when the service is provided to the traveller.
A Gray area here is ‘Material alteration’. This has not been properly defined but it generally means:
- Significantly Furnishing the apartment from its original state.
- Service provider adds in bigger alteration in the apartment such as changing the structure of the apartment.
- Serviced accommodation provider adds in some key features in the apartment. E.g., add in Catering services.
It should be noted that cosmetic or decorative changes made to the apartments., such as painting a wall or providing furnishings and decorative items would not amount to material alteration.
4. Benefit of the Traveller
A traveller is an entity, including a business or local authority, who receives a supply of a Margin Scheme supply, other than for the purpose of resupply.
Delve into our comprehensive breakdown of ” VAT Calculation under the Tour Operators’ Margin Scheme “. Read now to navigate the complexities and optimise your VAT strategy.
Under what circumstances would you not want to use the TOMS scheme?
TOMS applies compulsorily if you fill all the necessary criteria vis-à-vis your residential property, no material alteration, you provide travel accommodation services, and the margin is above the limit.
Under TOMS, you can not issue any VAT invoices to your customers as customers are not allowed to recover the VAT on the margin.
For the traveller, it is justifiable as they are the end consumer and do not provide any forward taxable supply.
However, if the customer is a business, in that case, the business cannot claim the tax credit as the invoice will be issued without VAT. This way, it would be instantly expensive for the business to use such service accommodation.
Exploring the Service Accommodation Sector
Serviced accommodation refers to fully furnished properties available for both short and long-term. This type of accommodation may also offer facilities similar to hotels. Serviced accommodation, though it provides similar services to hotels, has few differences.
Serviced accommodation is fully furnished and has all the necessary furniture or equipment needed in a house; this is not the case in hotels which comes with some furniture but not a fully stack as serviced accommodation. In addition, services accommodation comes with a kitchen and hotel rooms do not. In short, service accommodation is a home away from home.
TOMS scheme would revive the serviced accommodation sector as VAT liability is much less than the normal VAT Scheme where the business pays substantial part on VAT as shown in the example above.
Read our article on “A Complete Guide to Tax on Rental Income UK”.Gain valuable insights and expert guidance on minimising tax liability for your rental income.
Sonder Europe Ltd v/s HMRC
Sonder’s business model of acquiring accommodation from landlords and providing it to travellers aligned with the essence of TOMS.
Although Sonder’s Case dealt with holiday accommodation supplies, the fundamental principle of TOMS remained relevant: the VAT treatment of supplies depended on whether they were provided for the benefit of travellers and without material alteration or further processing.
This case has been a significant boost to the service accommodation business as this has made TOMS applicable to the Service Accommodation business.
Disclaimer: HMRC has filed an appeal against this verdict by the tribunal to the Upper Tier VAT Tribunal.
As of now, service accommodation businesses can continue to use TOMS. However, if HMRC wins, VAT return will need to be recalculated using the normal VAT rule.
To know more about this case read our article on ” Sonder Europe Ltd v/s HMRC”.
Conclusion
Following the ruling in the case of Sonder Europe Ltd, the Tour Operators’ Margin Scheme (TOMS) can be applied to Serviced Accommodation businesses. This development represents a substantial benefit to such businesses, as it promises substantial VAT savings.
Nevertheless, it’s worth noting that the verdict in the Sonder Europe Ltd case is currently under appeal in the tribunal. Consequently, this initial ruling remains subject to potential reversal by the upper Tier tribunal.
At present, based on the initial verdict, Serviced Accommodation businesses have the option to implement VAT under the Tour Operator’ Margin Scheme.
