As the population gets back to travelling overseas more frequently travel agents have seen a resurgence in bookings. There have been recent changes to the UK VAT rules applicable to sales of travel packages, known as the Tour Operator Margin Scheme (TOMS), resulting from Brexit and an interim reduced VAT rate for particular tourism and leisure activities.
By way of background, the TOMS is an EU VAT simplification that prevents EU established travel and tour operators from having to register in each country they operate in. Organisations will have welcomed the fact that post Brexit the UK government retained the TOMS rules in the UK.
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 and 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 most recent 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.
HMRC had also extended the reduced rate of VAT for hospitality and tourism to 31 March 2022. That applied to supplies such as accommodation, catering, trips and came into force to try to provide financial support to businesses reopening during the COVID-19 pandemic. From 1 April 2022, UK VAT was applicable at the standard rate and businesses will need to ensure that their systems have been updated so as to account for VAT at the correct rate.
TOMS is an ever-changing environment and recent cases bring to the forefront how complex the scheme can be, with the likes of Uber arguing that private-hire operators are eligible to apply TOMS and therefore pay VAT on the profit margin made, instead of on the full fare. This falls back to Uber’s stance that they are an agent that buys the private-hire service and resells to its customers on the Uber app. As expected, HMRC have strongly objected to Uber’s use of the scheme.
In addition, as TOMS is an EU simplification several EU member states have questioned the zero-rating of TOMS supplies by UK operators, because it prevents local VAT from being charged and collected within the EC Single Market. This has brought forward suggestions that “UK TOMS” cannot be applied to supplies in the EU. Instead, UK operators would need to register in the Member States where the supply will take place or used and enjoyed, therefore collecting VAT on behalf of that tax authority.
There is a growing concern that implementing such rules would heavily hit the travel industry and make it an unsustainable market to operate in for many UK operators. The argument to suggest that the VAT loss in the EU is significant enough to warrant the changes has been countered by the fact that the travel industry brings in a substantial amount more than any changes to the TOMS system would collect and discussions appear to be ongoing. For now, TOMS remains in place for UK operators, but market operations need to be aware of the potential changes to this already complicated area of VAT law.
Businesses should familiarise themselves with the most recent changes to TOMS to understand how the rules require VAT to be accounted for. In addition, those involved with live events (not online), or make supplies that when packaged fall into TOMS (such as accommodation and transport) should clarify whether their supplies fall under TOMS.
To discuss this issue further, contact Robert Marchant or your usual Crowe contact.
This article was first published in Forbes Online in June 2021, but has been updated to reflect up-to-date developments in August 2023.
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