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Brexit and the Tour Operators’ Margin Scheme

James Masters, Assistant Manager, VAT and Customs Duty services
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As the UK begins to issue the ‘green light’ for several tourist destinations, travel agents have seen a resurgence in bookings. At the same time, they should be aware of several UK VAT changes, including implications of changes to the Tour Operator Margin Scheme (TOMS) resulting from Brexit and an interim reduced VAT rate for particular tourism and leisure activities.

Retention of TOMS

The TOMS is an EU VAT simplification that prevents EU businesses from having to register in each country they operate in. Organisations will have welcomed the fact that Brexit has not resulted in a withdrawal of the scheme, and they can continue to account for VAT using TOMS.

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 new 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.

Extension of the reduced rate of VAT

In addition to the changes to EU TOMS supplies, HMRC has extended the reduced rate of VAT for hospitality and tourism to 30 September 2021. This applies to supplies such as accommodation, catering, trips, etc. This came into force to try to provide financial support to businesses reopening during the COVID-19 pandemic. HMRC has confirmed that this reduced rate will be extended further, from 1 October 2021 to 31 March 2022, but will have a new rate of 12.5% instead of 5%. Although this does not impact the rate of VAT charged on TOMS supplies, the reduced rate will impact the margin calculated using TOMS, assuming VAT savings are passed on by the supplier, as the margin is calculated by reference to the VAT inclusive purchase price.

Action to take

TOMS is a complicated area of VAT law that is easy to get wrong, and businesses should familiarise themselves with the new changes to TOMS in detail to understand how they may affect their supplies. In addition, those involved with events should clarify whether their supplies fall under TOMS, which is only the case when packaged with other margin supplies.

To discuss this issue further, contact Robert Marchant or your usual Crowe contact.

This article was first published in Forbes Online in June 2021.

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