Extending the margins – Developments affecting the UK Tour Operators Margin Scheme

17 August 2023 / Insight posted in Article

There have been a number of developments recently in connection with a special VAT scheme, called the Tour Operators Margin Scheme (TOMS), which warrant further comment. TOMS has been in place since 1987 and has not significantly changed in this period, bar some recent post-Brexit changes, so questions are rightly being raised about whether the scheme is appropriate in the modern age. These questions are only accentuated by the pace of recent developments. 

In particular, we have seen a recent tax tribunal decision potentially extend the operation of TOMS to the sub-letting of traveller accommodation alongside a recent report indicating that the ride-hailing firm Uber are now arguing that they fall within TOMS. This article also explores how these developments tie into recent work by the European Commission on VAT in the digital age. 

TOMS is a compulsory VAT accounting scheme for those that fall within the criteria, so in light of these recent developments, businesses should take stock and consider whether they could be affected by TOMS, now or in the future.. 

What is TOMS? 

TOMS applies to UK businesses which buy and resell travel related services, technically referred to as “designated travel services”. Designated travel services are defined as a supply of goods or services, made by a “tour operator” with a business establishment in the UK, which are: 

  • Initially acquired for the purposes of the business; and 
  • Supplied for the benefit of a traveller without material alteration or further processing. 

The types of services usually covered by “designated travel services” include accommodation, transportation, vehicle hire, organised trips, tour guide services, and other travel excursions. 

The term “tour operator” covers a surprisingly broad range of businesses and includes many which would not colloquially fall within the definition. Therefore, whilst TOMS most frequently applies to traditional tour operators and travel agents, it can also apply to businesses such as conference organisers, hotels, training course providers, and event organisers.  

In simple terms, TOMS is designed to apply VAT at the standard 20% rate to the UK profit margin achieved by the tour operator. Any profit margin apportioned to supplies outside the UK will be zero rated (i.e. subject to VAT but at a rate of 0%). TOMS is a simplified scheme as it does not require the calculation of input tax on costs and output tax on gross supplies, which can be complicated given the usual cross-border aspect of travel services. The calculation requires businesses to account for VAT by applying provisional percentages, based on the previous year-end consolidation, to net sales in each VAT return. The business then undertakes a year-end consolidation which comprises a complicated set of calculations to reconcile the total margin and VAT exposure. 

Evolving scope 

We have noted that the term “tour operator” covers a broad range of businesses but we have also seen TOMS being applied more extensively than previously anticipated. This has been illustrated by the following developments: 

  • Uber have reportedly taken the view that they are subject to TOMS following a change in their business model from March 2022. For context, Uber’s previous business model was predicated on Uber being an “agent” for the “principal” (i.e. the driver), meaning that the driver was the primary provider of the services and Uber just facilitated the transaction in return for an agency fee with VAT only charged on this marginal fee as opposed to the full service. A Supreme Court decision cast doubt on the efficacy of this business model, which was ultimately struck down in March 2022 by the High Court in the context of the regulatory framework applicable to London. There has now been a subsequent High Court decision extending this conclusion to the regions outside of London, meaning that all private hire and taxi firms will need to reassess their use of this agency business model.  It is currently being reported that HMRC and Uber are in a dispute over an additional VAT amount of £386m (presumed to be the VAT saving from operating TOMS) with the dispute due to be heard in the UK tax tribunal. In a purely technical sense, given the breadth of TOMS, it appears that Uber could superficially satisfy the legislative criteria but this will be for the tax tribunal to decide. If the tribunal agrees with Uber, this could substantially extend the scope of the TOMS provisions to a broader range of firms, such as any firm facilitating taxi fares and other travel in a similar manner. 
  • The recent case of Sonder Europe Limited confirmed that TOMS can apply in the context of a company leasing accommodation from third parties for subsequent sub-letting to both corporate and leisure travellers on a short-term basis. The company undertook only minor decorating work before sub-letting the accommodation which therefore satisfied the requirement to supply the good or service “without material alteration or further processing”. As the company in this case incurred costs on exempt leases, no input tax would have been allowed under normal VAT accounting but, by restricting VAT to the post-cost margin, the company obtained a substantial VAT saving through the operation of TOMS. Whilst the case does not establish a judicial precedent, this case prospectively opens the door for certain rented accommodation providers not previously having considered TOMS. 

These disputes are likely to continue and it is possible that we will see similar cases making their way to the tax tribunal shortly. There is therefore a chance that the government will begin to tinker with the TOMS legislation. TOMS originated as an EU scheme to avoid businesses having to register for VAT in several jurisdictions where they operate across the EU. The European Commission have undertaken a number of reviews into TOMS and are reportedly considering various revisions in 2024 or 2025 as part of a wider review into VAT in the Digital Age (ViDA). Now that the UK has left the EU, there is scope for the government to head in a different direction. A simple option could be scrapping TOMS entirely but this, together with the high VAT threshold, could be distortive as booking through a central “tour operator” would attract VAT whilst booking directly with the individual provider (if they are below the VAT threshold) would not. HMRC using their power to simply designate that certain services, such as private hire taxi services, fall outside the definition of “designated travel services” and the scope of TOMS could be the most immediately attractive solution, but does not eliminate the economic distortions. Some of these distortive effects arise from inherent friction between the wider VAT framework and the digital economy, meaning that future UK reform is likely to be more expansive. Our view is that any UK TOMS reform will be closely guided by the current work of the European Commission, as the UK VAT system is fundamentally grounded in EU law. In our view it appears likely that the UK will carve out services, like private hire taxis, from TOMS prior to more transformative reform. 

There are also further complexities which are not considered in this article concerning the general application and operation of TOMS. Therefore, should you wish to discuss any of these points further or consider whether your business may fall within the scope of TOMS, then please do not hesitate to contact our team of VAT experts and we can explore how Moore Kingston Smith can be of assistance. 

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