Tour Operators’ Margin Scheme (TOMS) is a different way of accounting for VAT when the eligibility criteria are met.
TOMS is generally applicable to tour operators, as the name suggest but many other businesses can fall into the scheme.
TOMS has special rules for how taxes are calculated, and it’s something tour operators need to pay attention to. Whether you’re running a tour or reselling travel services, understanding these rules helps you follow the law and manage your money smartly.
In this article we’ll break down the basics of how VAT (Value Added Tax) is calculated under TOMS, making it easier to grasp for businesses in the UK travel industry.
Effect of implementing Tour Operators’ Margin Scheme on VAT
Suppliers operating within the Tour Operators’ Margin Scheme face certain restrictions, as they are unable to reclaim input VAT on direct costs. However, they can still recover VAT on overheads and in house expenses, such as those related to activities carried out using their own resources, agent fees, and commissions.
Notably, under TOMS, the output VAT is calculated not on the total selling price but solely on the profit margin.
When the TOMS services are provided within the UK, the services are considered Standard Rated, requiring payment of UK VAT on the profit margin.
In contrast, if the services are delivered outside the UK, the margin is Zero rated in the UK, though potential overseas consequences may arise.
Notably, VAT invoices are not issued when TOMS is applied, posing a potential challenge, particularly when dealing with business entities as customers.
Tour Operators Margin Scheme (TOMS) and Serviced Accommodation
How does Tour Operators’ Margin Scheme Work?
TOMS computation operates on an annual basis rather than a transaction-by-transaction approach. This is primarily because calculating VAT on the margin for each individual trip can be challenging due to uncertainties in determining the exact margin at the time of travel.
Consequently, the actual VAT due is typically computed annually. Throughout the year, provisional VAT payments are made based on the previous year’s margin.
At year-end, a comparison is conducted between the actual VAT payable from the margin earned during the year and the provisional VAT paid, leading to an annual adjustment.
The VAT payable will be 1/6th of the margin (20/120), as it is considering that the margin already includes the 20% VAT.
Let us understand this with an example assuming, based on the pervious year, the VAT to be paid provisionally throughout the year is 3% of the TOMS Turnover and all the services are provided in the UK.
| Quarter | March | June | September | December | Total |
|---|---|---|---|---|---|
| TOMS Turnover* | £1,500.00 | £1,200.00 | £2,200.00 | £1,000.00 | £5,900.00 |
| TOMS Direct Cost** | £750.00 | £950.00 | £1,400.00 | £600.00 | £3,700.00 |
| VAT paid Provisionally (Turnover x 3%) | £45.00 | £36.00 | £66.00 | £30.00 | £177.00 |
| Actual Margin | £2,200.00 | ||||
| VAT under TOMS | £366.67 | ||||
| VAT Paid Provisionally | £177.00 | ||||
| VAT to be paid to HMRC after annual adjustment | £189.67 |
The VAT payable of £189.67 on the above example is due to HMRC on next quarter’s VAT return.
*TOMS turnover encompasses the entire gross selling price of TOMS-eligible travel services, excluding non-TOMS related services such as cancellations or compensation.
**TOMS cost refers to the gross direct cost specifically associated with the provided travel services, encompassing expenses like all purchased costs related to the travel services.
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Computation of VAT on TOMS including non UK business
Most of the Tour Operators’ business is not restricted to UK travels. Where the services includes both UK travels and non UK travels, there will be some changes compared to what we have discussed above as the services that is provided outside of the UK is Zero rated.
Continuing with the above example let us consider the with the following additional information:
Total non UK TOMS turnover = £50,000
Total non UK TOMS cost = £18,000
The provisional VAT payment to be same as above example
Now the VAT will be computed as follows:
| Particulars | Amount |
|---|---|
| UK TOMS Turnover | £5,900.00 |
| Non UK TOMS Turnover | £50,000.00 |
| Total Turnover | £55,900.00 |
| UK TOMS Direct Cost | £3,700.00 |
| Non UK TOMS Direct Cost | £18,000.00 |
| Total Cost | £18,000.00 |
| Gross Margin | £21,700.00 |
| Standard Rated Margin (Total UK TOMS cost/Total Cost x Gross Margin) | £34,200.00 |
| VAT Due | £971.89 |
| VAT Already Paid | £177.00 |
| VAT to be Paid to HMRC | £794.89 |
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Computation of VAT under TOMS including the In-house services
In-house services refer to additional services provided directly by the tour operator. These in-house costs are considered standard rated and fall outside the TOMS scheme.
This is because these services are not purchased and resold to the traveller but are instead resold directly by the service provider from their own resources or one where what has been purchased has been materially altered when it is supplied on.
