By Chris Photi, Head of Travel and Leisure at White Hart Associates
With all the focus on the terrible impact of the pandemic, it’s easy to forget that the transition period for the UK’s exit from the EU will end shortly and there will be changes from January 1st.
For the travel industry, that means new rules for Value Added Tax (VAT) on the Tour Operators’ Margin Scheme (TOMS).
Put simply, when a company buys in and resells certain travel services, either as a principal or undisclosed agent, it has to pay VAT on the margin, or the difference between the selling price and the cost of the travel service. But the current TOMS is an EU scheme, so changes were inevitable.
In this article I’ll explain the new rules for companies acting as principals as there are separate rules for agents.
A new UK version of TOMS was drawn up last year, to be implemented in the event of a no-deal Brexit, but HMRC have decided the best course of action is to implement it anyway from January 1.
The main change is that the VAT will only need to be paid on UK holidays and UK travel, compared with the whole EU at present.
Companies that do not sell holidays in the UK will not have to pay TOMS VAT because the margin on all forms of travel outside the UK will be zero-rated.
Apart from that, the new scheme mirrors the existing scheme and will apply to tour operators that are established, or have a fixed establishment, in the UK.
An important point to note is on the arrangements for transport.
Companies will be aware in the mid-1990s, ABTA agreed various transport mitigation arrangements with the government.
This ensured VAT was not paid on the margin made on passenger transport that would have been zero rated when supplied outside of TOMS. Companies did not, therefore, suffer a competitive disadvantage against suppliers not required to use TOMS.
However, as there will be no benefit from operating a transport mitigation arrangement for destinations outside the UK from January 1, we expect firms to stop using these schemes (eg The VAT Transport Company Scheme). The arrangements can still be applied for holidays within the UK.
The UK VAT treatment of travel services falling outside TOMS will be unchanged.
White Hart Associates are specialist accountants for the travel industry. Visit whitehartassociates.com or contact 0208 878 8383 for more information.