VAT: TOUR OPERATORS' MARGIN SCHEME

HMRC consultation on changes to TOMS
EU harmonisation of TOMS

HMRC Consultation on Changes to TOMS

On 6 June 2008, HM Revenue & Customs (HMRC) and the Treasury launched a consultation exercise on a number of changes which are required to be made to the UK VAT system as it applies to travel businesses.  In particular, tour operators, suppliers of educational holidays, conference organisers, event organisers and incentive travel companies are likely to be affected. 

ABTA will be responding to the consultation.  If you'd like to ensure your views are considered by HMRC, please send your comments to David Marshall at ABTA by 16 August 2008.  The consultation document is available at www.abtamembers.org/TOMSconsultation.pdf.

There are three changes, all applicable to the Tour Operators' Margin Scheme (TOMS):

• the compulsory use of market valuation provisions for in-house supplies sold as part of a package with TOMS supplies;
• the cessation of the TOMS opt in; and
• the cessation of the TOMS opt out. 

Market Valuation

It's currently a requirement that in-house supplies (broadly, those supplied from own resources rather than purchased from a third party) sold as part of a package with TOMS supplies are accounted for within TOMS.

The TOMS calculation attributes a value to both the TOMS supplies and the in-house supplies based on their respective costs.  As long ago as 1998, the Madgett & Baldwin decision cast doubt on the validity of this approach and there was consideration of how tour operators might incorporate market valuation into their TOMS calculations.  HMRC, however, were unwilling to accept this market valuation approach.  The position was further tested by the MyTravel case in 2005 and again the concept of market valuation in these circumstances was accepted.

HMRC is now proposing that the use of market valuation will be compulsory whenever the tour operator can identify market value.  The consultation is to consider how market valuation should be adopted.

TOMS Opt Out

One contentious area of TOMS is whether the scheme applies to travel sold to other businesses.  In the UK, TOMS is considered to be applicable when travel services are sold to a business for use by that business but there is an opt out provision which allows the travel supplier to disregard TOMS and apply normal VAT accounting principles.
 
This allows the supplier to recover VAT on travel costs borne by it and to issue a VAT invoice to its customer so the customer can also recover VAT.  This opt out is regularly used by event organisers, conference organisers, incentive travel companies and suppliers of educational holidays to schools.  Unfortunately, HMRC and the Treasury now take the view that this opt out can't continue.  From a date still to be decided, but possibly 1 April 2009, the opt out will not exist and suppliers of travel based services to other businesses for those businesses' own use will need to use TOMS.  This will inevitably cause increased VAT costs in most circumstances.

TOMS Opt In

Travel supplied to another business but for onward sale by that business (normally referred to as wholesale supplies) falls outside TOMS.  However, there's an opt in which allows the suppliers of wholesale travel services to apply TOMS.  Certain wholesale tour operators find it beneficial, often in terms of ease of administration, to use TOMS in these circumstances. 

HMRC and the Treasury also believe that this measure needs to be discontinued.  Therefore, from the implementation date, this opt in will not exist and suppliers of wholesale travel services will not be able to use TOMS and will need to apply normal VAT accounting.

Background

These changes in the UK must be viewed in the context of measures being taken throughout the EU as regards the implementation of TOMS.  It's well known that implementation varies enormously between member states and that the European Commission has placed considerable importance on improving consistency in this area.  The Commission put forward proposals back in 2002 for a new scheme but these were never accepted.  The consequence of that failure to agree on a new scheme was the threat of legal proceedings against a considerable number of member states which in the view of the Commission aren't applying TOMS correctly.

In February this year, the Commission announced that it was taking formal legal actions against eight member states on their application of TOMS to travel supplied to businesses.  The UK wasn't included in the list of eight.

 It now seems clear that we weren't included because we had already agreed to change the practices which the Commission thought to be in breach of EU law.  The three changes described above are, therefore, all the result of representations made by the Commission and it is thought that we have no option but to introduce these changes.
 
There's still a considerable chance that negotiations will take place on EU wide changes to the TOMS system as there's support for this in many member states, so further changes to TOMS may be forthcoming in the next few years.

Members wanting further detail on any of the above can call our free VAT TOMS helpline.  Details are available in the Members' area of the site.

Last updated: 12 June 2008

EU Harmonisation of TOMS 

The revision of Article 26, to create a harmonised Tour Operators’ Margin Scheme (TOMS) across the EU, has been blocked in the Council of Ministers since end 2003. Several countries not correctly applying the special VAT schemes have been threatened with infraction proceedings.  The European Commission has just reopened discussions as it would prefer to find a long-term solution rather than start infraction proceedings.

ABTA’s Position

ABTA has lobbied hard through ECTAA and directly with HM Revenue & Customs (HMRC) to continue the exemptions currently enjoyed and to enable TOMS to work in the most effective way possible in the UK and other countries. We do not support the concept of one size fits all.  Whilst the UK correctly applies VAT in business-to-business transactions for services supplied by an intermediary where the buyer is responsible for taxation, it could be subject to infraction proceedings on elements to be tackled later.  The ABTA VAT Working Group is currently being consulted to ensure that we have an agreed position should any action be required. 

Last updated: 8 April 2008

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