The Tour Operators' Margin Scheme (TOMS) is a compulsory VAT scheme applicable to businesses that buy-in and resell travel, accommodation and certain other services as a principal or undisclosed agent (that is, acting in your own name). It works by requiring the seller to account for VAT only on the profit (or margin) they make, rather than paying output tax on their sale price and recovering input tax on their direct costs.
Not all holidays or excursions are subject to TOMS. It only applies to those that include the following elements:
- passenger transport
- hire of a means of transport
- trips or excursions
- services of tour guides
- use of special lounges at airports
This would cover most holidays, although there are several excursions that escape classification under TOMS. Attraction tickets, for example, are not included unless they are sold as part of a package including some or all of the above elements. Neither are most places of interest, restaurants or self-guided walks, although there are some exceptions. For example, hotel pick-ups will render an excursion subject to TOMS even if it only otherwise consists of admission to a theme park, and the popular City Passes for London and Paris are covered by TOMS because they include a river cruise and hop-on hop-off bus tours.
In-house supplies are specifically excluded from TOMS. These are essentially supplies made from your own resources. This would be the case where you happen to own the means of transport that your customers will be using, the hotel they will be staying at, or employ the tour guides who will be looking after them. The same applies to components that you buy in but materially alter in some way. Conference organisers are a good example. Although they may hire a hotel or conference centre as the venue, which is clearly not an in-house supply, the fact that they also provide their own audio-visual equipment and reception staff means that they have materially altered the service bought in, so it is not a margin scheme supply but an in-house supply. VAT should always be paid on these supplies in the usual way, not under TOMS.
However, if accommodation or transport is bought in and provided as an additional service to an in-house supply, then these elements must be accounted for separately under TOMS even if they form part of an overall package which you sell for a single price. The same goes for any other service forming part of the package, such as theatre tickets, that would not be covered by TOMS on their own but will do if they are a) not in-house supplies, and b) sold as part of a package including margin scheme supplies.
Another exclusion from TOMS is supplies made to other businesses for re-sale (as opposed to supplies for their own consumption). At present you still have the option of including these supplies in TOMS if you wish, which saves you the trouble of having to separately identify them, but this concession will be withdrawn with effect from 1st January 2010. It also means that when you receive invoices from your suppliers you will need to claim input tax on trade bookings but not on direct bookings as these will be covered by TOMS, so you will have to look up each item on an invoice in order to differentiate between the two.
An important point to bear in mind is that TOMS applies world-wide, so even if you only sell New York helicopter flights or African safaris you must still comply with the scheme. This means that you cannot recover input tax on your direct costs, although in such cases there is unlikely to be input tax anyway. Holidays and excursions outside the European Union are zero-rated and the place of belonging is always where the event takes place, so there would be no VAT liability on these. Events within the EU are a different matter however. If the excursion is covered by TOMS, then you must account for VAT on your margin if you are a VAT registered business. On the other hand, if an EU event is not covered by TOMS, then it would be zero-rated according to the standard VAT rules and no output tax would be payable.
If you make a variety of different supplies, spread across the UK, the EU and the rest of the world, and some of these supplies are covered by TOMS, you are expected to either calculate a provisional percentage for the VAT payable on your margin scheme supplies if it is your first year or base it on the percentages for the previous year. The provisional percentage may be based on projected margins or actual figures for the year to date. At the end of the year, you must then do a full reconciliation based on the actual figures for the whole year and calculate the true VAT liability on your margin supplies. Any difference between that and your estimated figures should then be adjusted on the next VAT return. Note that this reconciliation must be done in the first VAT quarter after your year end. You must not wait for audited accounts to determine the correct figures. If the adjustment turns out to be wrong, then you simply correct it on the next VAT return or make a Voluntary Disclosure if it the error exceeds £10,000.
You will appreciate from this that you need to designate your supplies with both a TOMS code (either Yes or No) and a destination code (such as UK, EU or WW) in order to calculate your VAT liabilities. The combination of the 2 codes will determine the VAT status, and it is vital that your reservations system can handle this. The actual VAT calculations can be done on spreadsheets if necessary by exporting the data and running conditional statements, but this is not ideal as bookings are often cancelled or amended and you need to pick up changes in historic data.
You also need to work out your margins which will mean updating net rates in foreign currencies and constantly applying the latest exchange rates. There are 5 methods of choosing which exchange rates to use, including those published in the Financial Times, the rates current at the time that the supplies in your brochure were costed, and the exchange rate actually used to pay for the supplies. However, once you have chosen a method of applying exchange rates, you must use it for the whole of your financial year. You cannot use different methods or change them retrospectively.
In addition to all this, you need to find a way of picking up input tax on your non-TOMS UK based events and excluding it on the others. Most excursions tend to be sold on a voucher basis whereby the tour operator only pays after the customer shows up at the event and redeems the voucher at the gate. Therefore, you will need to accrue input tax on the net rates for such events but only claim them on your VAT return when the invoice turns up, which could be months or even years later.
To make things even more complicated, there is the matter of agency commission. If you sell holidays or excursions to a travel agent and allow them a commission, often on a self-billing basis, your sales price is the amount before commission is deducted. This applies when the holiday or excursion is being sold in your name and you remain responsible for cancellations, upgrades, etc. Meanwhile, the commission itself is subject to output tax in the hands of the travel agent at the standard rate, regardless of whether the underlying transactions are covered by TOMS or not and wherever in the world the events may be. On the other hand, if the business buying your supplies acts as principal or undisclosed agent, then the commission is netted off your sales price for the purpose of calculating your VAT liability and there is no separate VAT charge on the commission.
Finally, if you make supplies to another business, even if they are acting as your agent, then you must differentiate between TOMS and non-TOMS items on your invoices. This is a fairly recent requirement and quite a few reservations systems do not handle it, which means that strictly speaking you should annotate all TOMS items by hand - something the EU bureaucrats probably didn't think of (or care about!) when they introduced this rule.
At Acumen, we are experienced in dealing with most VAT issues under TOMS. If you are a travel company struggling to make sense of the rules, please give us a call and we will help you to implement accounting systems capable of dealing with your VAT. We can also advise on all ancillary issues such as pricing, self-billing agreements and invoicing, and train your staff to the required levels of expertise.