Government revises guidance relating to TOMS
Keen readers of our blogs will recall my post at the beginning of this year, highlighting that travel organisers using the Tour Operators’ Margin Scheme (TOMS) would have to pay VAT on forfeited customer deposits and other cancellation fees, from March 1, 2019.
Thankfully, HMRC has concluded that this was an error and has now revised its guidance.
Instead, travel organisers should account for VAT when the traveller departs or the accommodation is occupied. So therefore, in their TOMS calculation, organisers do not include money paid for supplies that customers fail to take up.
Alternatively, organisers can account for VAT when taking payment if it exceeds 20% of the sale price, but this is not obligatory.
Any business that has paid too much VAT as a result of the initial advice can correct this by following the HMRC guidelines on the issue.
Lobbying was crucial
ABTA, with the help of the accounting industry, deserve credit for lobbying hard to get this ruling overturned.
The organisation wrote to HMRC in March after disagreeing with its interpretation of the VAT rules, urging it to overturn the ruling.
It’s difficult to say how much this incorrect advice was costing ABTA members, but it’s fair to say it was pretty substantial.
However, I’m not going to be too harsh on HMRC. There is no doubt that the Travel Industry felt the original decision was incorrect, but the important thing is that HMRC has responded swiftly. We’ve seen in the past how a change in legislation can drag on for years.
The correct decision
Some people might think that VAT should be paid on forfeited customer deposits and other cancellation fees. After all, the organisers are getting free money and shouldn’t they be paying tax on it?
Not exactly! The tour organiser has probably spent considerable time and effort to get the customer to book and put down a deposit. Also, out of that small deposit, they have probably had to outlay money to secure a hotel room (it’s not unheard of for a tour organiser to use all, or more, than the deposit to secure a booking).
So, to apply a tax on the forfeited deposit or cancellation fee would be wrong and HMRC has now come to that conclusion.
The Brexit factor
As I pointed out in my January blog, everything will change again in the event of a no-deal Brexit, as the TOMS margin on EU holidays will become zero-rated for UK VAT purposes.
That sounds like good news for tour organisers as they’ll be paying less tax.
But the joy could be short-lived. The danger is that UK companies might eventually have to register for VAT in each EU destination that they operate.
Some EU destinations pay less tax than the UK, so tour organisers may still pay less VAT than they do currently, but face a lot more administration and paperwork. And, at least initially, they’d incur the cost of having to employ local experts in those countries to ensure they were complying with the rules.
This one is likely to run and run, and we’ll keep you posted on developments.