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A Comprehensive Guide to the Tour Operators Margin Scheme (TOMS)
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What is TOMS?
The Tour Operator Margin Scheme, commonly referred to as TOMS, is a special VAT scheme for businesses involved in buying and reselling travel-related services. It is designed to simplify VAT obligations for businesses that sell travel packages, whether they identify as tour operators or not. This scheme considers multiple services sold to a single customer as one supply, which is taxable in the UK.
TOMS applies to businesses that deal with travel services such as accommodation, passenger transport, and ancillary services. These businesses could be acting as a principal or an undisclosed agent. Essentially, TOMS allows these entities to pay VAT only on the profit margin—the difference between what they sell a service for and what it cost them.
Scope of TOMS?
You might be affected by TOMS if you are involved in supplying travel, accommodation, or related services. This includes hoteliers who offer additional services like coach transport for their guests. It’s important to note that TOMS applies even if you don’t consider your business a traditional tour operator.
TOMS rules apply to UK businesses reselling travel services of tourist accommodation, transport, excursions, car hire, guides, and airport lounge access nationally or globally. These services are also called margin scheme supplies. Catering and admission tickets are also covered if bundled with any of the above as a package. TOMS rules would apply only if services bought in for reselling are sold as is without significant changes and in their name as a principal or undisclosed agent
Exclusions from TOMS
TOMS does not apply in certain situations:
- When acting as a disclosed agent with identifiable commission.
- If providing in-house supplies separately from those under the margin scheme.
- For sales to other businesses that will resell those services.
- If the services are incidental to your main business activities.
Additionally, travel services enjoyed both inside and outside of the UK fall under TOMS regulations.
Following is a flow chart to decide if a transaction is included in TOMS.
In-house supplies are supplies made from own resources or bought and materially altered. Example: If you own or rent a coach or train, provide a driver, fuel, road licenses, repairs, and other necessary services, you are making an in-house supply of coach or rail passenger transport. These are not bought-in supplies.
Under this scheme, there is no VAT deduction available for bought-in goods and services meant for resale. In the UK, operators must charge VAT only on the profit margin made on these sales. Additionally, any in-house supplies included in packages must also account for VAT under TOMS rules. If you want to know more about how VAT works generally, read our article on “VAT guide for small businesses”.
Under TOMS, seller can not recover input VAT on the purchase of services bought for resale. Instead, the seller pays VAT on the margin i.e. difference between selling price and cost. For the purpose of calculation of margin, the selling price and costs are VAT inclusive. Standard VAT rate is charged on UK travel while zero VAT rate is charged on non-UK travel. You can claim input VAT on expenses that are outside the scope of TOMS.
Tour Operating Margin Scheme Supplies
These are typically supplies that haven’t been materially altered by the operator and are provided directly to travellers from an establishment within the UK. Common examples include:
- Accommodation
- Passenger transport
- Vehicle hire
- Guided tours and excursions
- Airport lounge access
Other services like catering or event tickets can also fall under this category if they’re part of a package deal without significant alteration.
When your supply becomes taxable (the tax point)
There are two methods to determine the tax point.
Method 1: date of departure or date of occupation of accommodation whichever is earlier.
Method 2: date as per method 1 or date of receipt of payment whichever happens first.
We may have a single tax point or multiple tax points depending on whether we receive the whole amount in one go or instalments making up more than 20% of the selling price.
The total of instalments must be more than 20% of the selling price for a tax point to be created.
The tax point for the unpaid balance is created on the date of departure.
Issuing a VAT invoice for TOMS sales.
VAT invoices cannot be issued for supplies accounted for under TOMS as VAT is determined after the end of your financial year.
The invoice has to include a reference to indicate that the TOMS has been applied.
Example: ‘this is a Tour Operators Margin Scheme supply’
In-house supplies
For in-house supplies that are part of a package with margin scheme supplies, TOMS rules apply. However, when these supplies stand alone or are separate from margin scheme supplies, normal VAT rules are observed. Operators must choose between two methods—cost-based or market value—to quantify these in-house supplies accurately.
The choice of method will depend on the availability of information regarding cost and market value. You may have to use a mixture of methods if you can calculate the market value of some and not all services.
Furthermore, where your business is established affects how your account for VAT on these travel supplies. For instance:
- Passenger transport is taxed where it takes place.
- Accommodation VAT applies based on its location.
- Live entertainment is taxed where performed.
Year-End Calculations
At the end of each financial year, operators need to calculate their total margin achieved and work out their output tax due. There’s also a simplified calculation method available under certain conditions which streamlines this process further.
The calculation should be done immediately after the financial year-end, with adjustments on the VAT return for the following period. Example: Your financial year ends on 31 March. Any adjustment must be entered on the VAT Return for periods ending April, May or June, whichever applies to you.
The year-end calculation will follow the following steps:
- work out the total margin achieved.
- apportion the total margin between different types of supplies, that is, Margin Scheme, in-house, agency.
- apportion the total margin between supplies with different VAT liabilities.
- work out the output tax due.
- work out net values for the supplies.
How the year-end calculation works?
There are now 2 TOMS accounting methods, the:
- market value calculation: deduct the market value of in-house supplies from the full package price to arrive at the market price of bought in margin scheme supplies.
- cost-based calculation: The apportionment of the total margin calculated is based on the direct costs of your supplies, that is, not indirect or overhead costs.
Example
If the purchase prices of your standard-rated Margin Scheme supply amount to 30% of your total direct costs, the calculation will determine that 30% of your total margin relates to standard-rated Margin Scheme supplies.
You should not change back and forward between the 2 methods simply because at any given time one method or the other results in less tax being due.
Simplified end-of-year calculation (annual adjustment)
If all your in-house supplies and all your margin scheme supplies are liable to VAT at the standard rate, you must use the simplified calculation.
| 1 | Total VAT-inclusive selling prices |
| 2 | Less Total the VAT-inclusive purchase prices |
| 3 | Total margin inclusive of VAT (1-2) |
| 4 | output VAT due =Margin X VAT standard rate (3X20%) |
| 5 | VAT-exclusive value of your Margin Scheme supplies=total margin including VAT less output VAT (3-4) |
| 6 | Total of provisional output VAT accounted for on sales in 1 |
| 7 | Deduct total provisional output VAT in 6 from total in 4 |
You cannot use the simplified calculation if any of your supplies are zero-rated, reduced rated or outside the scope of VAT.
How to account for VAT during the year?
Once you have completed one of the year-end calculations, you will have percentages enabling you to provisionally account for output tax and enter net sales values on your first VAT Returns following the end of financial year.
TOMS requires you to account for output tax on a provisional basis on your VAT Returns during the year, with a year-end calculation and any adjustment to be done during the next VAT Return period.
If you have just started to use TOMS, you must work out a provisional percentage to use during the first relevant financial year. This can be based on past or projected figures.
How to work out the selling price of your TOMS supplies?
Selling prices will include the following.
VAT-inclusive selling price of margin scheme supplies (accommodation, transport etc) plus in-house supplies made with margin scheme supplies plus unidentifiable commission from supplies packaged with margin scheme supplies and forfeited deposits and cancellation fees. Exclude refunds and discounts.
How to work out the purchase price of your Margin Scheme supplies
The purchase price will include the following.
Total VAT-inclusive purchase prices of the goods and services that you have bought in for resale as Margin Scheme supplies. Do not include discounts or any indirect costs.
Indirect costs are general business costs, which are not directly and specifically incurred in order to make Margin Scheme or in-house supplies. Examples include brochures, advertising, office expenses, legal and professional fee, commission paid to agents etc.
Direct costs of making in-house supplies: You must include the VAT-exclusive direct costs incurred in making your in-house supplies (packaged with margin scheme supplies) in your year-end TOMS calculations.
Let’s assume a company year-end is 31 December and its VAT quarters are March, June, September and December.
Example: A
Company is selling TOMS supplies only in UK without in-house supplies.
| Total TOMS sales | 1 | £250,000.00 |
| Total costs UK | 2 | £210,000.00 |
| Gross profit margin (1-2) | 3 | £40,000.00 |
| Standard rated margin (100% of GP) as all UK sales | 4 | £40,000.00 |
| VAT due (Margin /120*20) | 5 | £6,666.67 |
| TOMS already paid in March, June, September and December | 6 | -£8,500.00 |
| TOMS VAT annual adjustment 6-5 (VAT overpaid hence refund due) | 7 | -£1,833.33 |
TOMS supplies only in UK without in-house supplies.
Example: B
Company is selling TOMS supplies both in UK and outside UK without in-house supplies.
| Total TOMS sales | 1 | £250,000.00 |
| Total UK TOMS cost | 2 | £20,000.00 |
| Total non-UK costs | 3 | £190,000.00 |
| Total costs 2+3 | 4 | £210,000.00 |
| Gross profit margin 1-4 | 5 | £40,000.00 |
| Standard rates margin 5/4*2 | 6 | £3,809.52 |
| VAT due (Standard rated Margin as per 6 /120*20) | 7 | £634.92 |
| TOMS already paid in March, June, September and December | 8 | -£3,000.00 |
| TOMS VAT annual adjustment 7-8 (VAT overpaid hence refund due) | 9 | -£2,365.08 |
TOMS supplies both in UK and outside UK without in-house supplies.
We used cost as the basis for allocation of margin attributable to UK sales as UK sales have a standard rate of 20% while non-UK sales are zero rated.
Example: C
Company is selling TOMS supplies both in UK and outside UK with in-house supplies.
| Calculate in-house sales | ||
| Total sales for TOMS packages | 1 | £470,000.00 |
| in-house costs | 2 | £225,000.00 |
| TOMS UK costs | 3 | £35,000.00 |
| TOMS non-UK costs | 4 | £85,000.00 |
| Total costs | 5 | £345,000.00 |
| % in-house cost 2/5 | 6 | 65.2% |
| In-house sales | 7 | £306,521.74 |
| TOMS sales | 8 | £163,478.26 |
| Total TOMS sales | 8 | £163,478.26 |
| TOMS UK costs | 3 | £35,000.00 |
| TOMS non-UK costs | 4 | £85,000.00 |
| Total TOMS costs | 9 | £120,000.00 |
| Gross profit margin 8-10 | 10 | £43,478.26 |
| standard rated margin (UKTOMS)-10/9*3 | 11 | £12,681.16 |
| VAT due 11/120*20 | 12 | £2,113.53 |
| TOMS already paid in March, June, September and December | 13 | -£3,000.00 |
| TOMS VAT annual adjustment 13-12 (VAT overpaid hence refund due) | -£886.47 |
TOMS supplies both in UK and outside UK with in-house supplies.
In the above example we needed to split sales attributed to in-house supplies as these sales are out of scope of TOMS. We used the cost basis to split sales into TOMS sales and in-house sales.
Special Considerations
For cruise ships and connected flights, special rules dictate how days spent in or out of the UK are acounted towards VAT liabilities. Moreover, specific tax points determine when your supply becomes taxable—a crucial detail for accurate accounting.
Different Accounting Schemes
It’s worth mentioning that some accounting schemes like Cash Accounting cannot be used alongside TOMS due to its specialized tax point rules; however, Annual Accounting can be applied. New businesses cannot use TOMS under a flat rate scheme.
Conclusion
Tour operators and similar businesses dealing with travel-related packages must navigate through the intricacies of TOMS to ensure proper compliance with VAT laws. From identifying what constitutes a Margin Scheme supply to understanding how to perform year-end calculations and account for various types of supplies throughout the year – mastering TOMS is essential for operating within legal parameters to avoid penalties.
Do you need assistance in complying with TOMS? Leave your worries to Fusion Accountants who will take control of your TOMS compliance so that you can run your business with peace of mind .
